MOTION to Unseal Document [102] SEALED MOTION FOR LEAVE TO FILE DOCUMENT UNDER SEAL filed by SECURITIES AND EXCHANGE COMMISSION (This document is SEALED and only available to authorized persons.) filed by SECURITIES AND EXCHANGE COMMISSION by SECURITIES AND EXCHANGE COMMISSION. (Attachments: # (1) Text of Proposed Order, # (2) Exhibit SEC Motion To Compel Exhibit 10 (Redacted), # (3) Exhibit SEC Motion to Compel Exhibit 14 (Redacted), # (4) Exhibit SEC Motion to Compel Exhibit 15 (Redacted), # (5) Exhibit SEC Motion to Compel Exhibit 16 (Redacted), # (6) Exhibit SEC Motion to Compel Exhibit 19 (Redacted), # (7) Exhibit SEC Motion to Compel Exhibit 21 (Redacted), # (8) Exhibit SEC Motion to Compel Exhibit 26 (Redacted), # (9) Exhibit SEC Memorandum in Support of Its Motion To Compel, # (10) Exhibit Declaration of Jennifer Farer in Support of SEC Motion to Compel)(Scarlato, Matthew). Added MOTION to Withdraw on 9/15/2023 (znmw).
Page 1 UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
__________________________________________
)
SECURITIES AND EXCHANGE
)
COMMISSION,
)
)
Plaintiff,
)
)
v.
)
No. 1:23-cv-01599-ABJ-ZMF
)
BINANCE HOLDINGS LIMITED,
)
BAM TRADING SERVICES INC.,
)
BAM MANAGEMENT US HOLDINGS
)
INC., AND CHANGPENG ZHAO,
)
)
Defendants.
)
__________________________________________)
PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S
MEMORANDUM IN SUPPORT OF ITS MOTION TO
COMPEL AND FOR OTHER RELIEF AND OPPOSITION
TO THE BAM DEFENDANTS’ MOTION FOR A PROTECTIVE ORDERPage 2 TABLE OF CONTENTS
PRELIMINARY STATEMENT ................................................................................................. BACKGROUND ........................................................................................................................
I.
The Proceedings Leading Up To The Consent Order ...................................................
II.
The SEC’s Efforts to Obtain Discovery Regarding Customer Assets ......................... A.
B.
The SEC’s Requests for Production and Interrogatories ................................. i.
Discovery concerning crypto asset wallet custody and “Ceffu” ................
ii.
Discovery concerning BAM’s communications ........................................
iii.
Accounting documents and other financial information ...........................
iv.
The SEC’s request for inspection..............................................................
v.
BAM’s Interrogatory responses ................................................................
SEC’s Notice of Depositions ...............................................................................
LEGAL STANDARD ................................................................................................................. ARGUMENT ........................................................................................................................
I.
The Court Should Compel Defendants to Comply With The Consent Order’s
Expedited Discovery Provisions.....................................................................................
II.
The Court Should Deny BAM’s PO Motion and Allow the SEC to Depose BAM’s
CEO, CFO, and the Additional Witnesses the SEC Identified for Deposition ......... A.
The SEC Should Be Permitted to Depose BAM’s CEO and CFO .................
B.
The Court Should Deny BAM’s Motion for Protective Order as to the
Number of Depositions and Allow the SEC to Depose Identified Witnesses............. III.
The Court Should Extend the Expedited Discovery Period........................................
CONCLUSION ........................................................................................................................
iiPage 3 TABLE OF AUTHORITIES
Cases
Affinity Labs of Tex. v. Apple, Inc.,
No. C 09-4436 CW JL, 2011 WL 1753982 (N.D. Cal. May 9, 2011) .............................. Athridge v. Aetna Cas. & Sur. Co.,
184 F.R.D. 181 (D.D.C. 1998).......................................................................................... Breiterman v. United States Capitol Police,
324 F.R.D. 24 (D.D.C. 2018)............................................................................................ Celerity, Inc. v. Ultra Clean Holding, Inc.,
No. C 05-4374 MMC (JL), 2007 WL 205067 (N.D. Cal. Jan. 25, 2007) ................... 29, English v. Wash. Metro. Area Transit Auth.,
323 F.R.D. 1 (D.D.C. 2017).............................................................................................. Moore v. Napolitano,
723 F. Supp. 2d 167 (D.D.C. 2010) .................................................................................. Reif v. CNA,
248 F.R.D. 448 (E.D. Pa. 2008) ........................................................................................ Ronaldson v. Nat’l Assoc. of Home Builders,
No. 19-01034 CKK/DAR, 2020 WL 3259226 (D.D.C. June 3, 2020)............................. Salter v. Upjohn Co.,
593 F.2d 649 (5th Cir. 1979) ............................................................................................ In re Ski Train Fire of Nov. 11, 2000 Kaprun Austria,
No. MDL 1428(SAS)THK, 2006 WL 1328259 (S.D.N.Y. May 16, 2006) ..................... Tequila Centinela, S.A. de C.V. v. Bacardi & Co., Ltd.,
242 F.R.D. 1 (D.D.C. 2007).................................................................................. 21, 22, United States v. Newman,
531 F. Supp. 3d 181 (D.D.C. 2021) .................................................................................. Welzel v. Berstein,
233 F.R.D. 185 (D.D.C. 2005).......................................................................................... Wilson v. DNC Servs. Corp.,
831 F. App’x 513 (D.C. Cir. 2020) ...................................................................................
iiiPage 4 Rules
Fed. R. Civ. P. 26 ........................................................................................................................
Fed. R. Civ. P. 33 ........................................................................................................................
Fed. R. Civ. P. 34 .............................................................................................................. 15, 21,
ivPage 5 PRELIMINARY STATEMENT
On June 17, 2023, the Court entered a Consent Order (Dkt. No. 71) in which all of the
Defendants—including BAM Trading Inc. and BAM Management US Holdings Inc. (together,
“BAM”)—agreed to provide expedited discovery and other relief relating to the custody,
security, and availability of U.S. customer assets and those of BAM itself. That Consent Order
followed the Court’s express recognition of the “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.” (See “Farer Decl.” ¶ 3, Ex. 1, at 79:17-21.) Critically, the Consent Order required that all Customer Assets—to include all existing
and New Private and Administrative Keys relating to BAM’s Customer Crypto Assets and root
access associated with the Amazon Web Services (“AWS”) account(s) for the Binance.US
Platform—be solely in BAM’s custody and “complete control” in the United States, absent an
express exception, and “not be provided to or in any way shared with the Binance Entities.”
(Dkt. No. 71 at I, II.2.) More than two months later and despite repeated good faith attempts by the SEC to reach
further compromise with BAM, the SEC finds itself essentially where it was when it first sought
relief from the Court. BAM continues to refuse, even in light of the Consent Order, to provide
anything beyond extremely limited information to ensure that BAM’s Customer Assets are not at
the mercy of Defendants Binance Holdings Limited (“Binance”) and Changpeng Zhao, two
persons who view themselves outside the reach of the Court. To the contrary, the limited
“Farer Decl.” refers to the Declaration of Jennifer Farer submitted in further support of the
SEC’s Motion to Compel and Opposition to the BAM Defendants’ Motion for a Protective
Order. Exhibits to the Farer Declaration are hereafter cited as “Ex.”
“Customer Assets,” “New Private and Administrative Keys,” “Customer Crypto Assets,” and
“Binance Entities” are defined in Sections I and II of the Consent Order. (Dkt. No. 71.)Page 6 discovery BAM has provided to date raises questions about whether Defendants are in violation
of the Consent Order because Binance Entities, including a newly rebranded Binance Entity
called “Ceffu,” appear to have control of Customer Assets through their role in the establishment
of wallets and keys shards related to BAM Customer Crypto Assets and control of the AWS
environment that hosts the wallet custody software and stores the keys for BAM company and
Customer Assets.
Accordingly, while the SEC is mindful of seeking the Court’s intervention, immediate
production of the requested discovery is essential to determine not only whether Customer
Assets are being safeguarded in the manner agreed to by the parties and contemplated by the
Court in the Consent Order, but whether it may be appropriate for the SEC to seek an order to
show cause why BAM should not be held in contempt of that Order.
Following entry of the Consent Order, the SEC issued discovery requests focused on
information sufficient to provide assurances that all customer and BAM assets are properly
accounted for, within BAM’s exclusive control in the United States, available for withdrawal to
satisfy customer liabilities, and not subject to control by Binance Entities. BAM has produced
only approximately 220 documents, many of which relate to reporting otherwise required under
the Consent Order, and many that consist of unintelligible screenshots and documents without
dates or signatures. Further, BAM has refused to produce essential witnesses for deposition,
instead agreeing only to four depositions of witnesses it has unilaterally deemed appropriate. It
has responded to requests for relevant communications with blanket objections and has refused
to produce documents kept in the ordinary course of its business, claiming those documents do
not exist, only for the SEC to later receive such documents from other sources.
2Page 7 The circumscribed discovery that BAM has produced to date has not alleviated the
concerns that led to the entry of the Consent Order at the outset of this action. Defendants still
cannot credibly explain the continued role of the Binance Entities in the custody and control of
BAM’s crypto assets and Customer Crypto Assets or provide credible evidence that BAM
personnel maintain sole possession, custody, and control of BAM company and Customer Assets
in the United States. BAM, for example, initially refused to provide information concerning
Ceffu, claiming such discovery was “unrelated to the current custody and control of Customer
Assets,” but later admitted that Ceffu had created BAM’s new crypto asset cold wallets and New
Private and Administrative Keys, and simply referred the SEC to Ceffu to obtain information on
how Ceffu created BAM’s wallets. Further, the SEC’s recent deposition of BAM’s Chief
Information Security Officer only increased the SEC’s concerns; he testified that
but he had no knowledge about
, could not identify the
, and confirmed that
.
Because BAM has refused to provide meaningful discovery regarding the safety and
security of customer and BAM assets, and because its conduct has resulted in delay, the SEC
respectfully requests that the Court (1) order BAM to produce responsive documents,
communications, information, and inspection access, as more fully set forth herein and in the
attached Proposed Order; (2) deny BAM’s Motion for a Protective Order; and (3) extend the
period for expedited discovery to permit BAM 14 days from the Court’s order on the pending
discovery motions to substantially complete any additional discovery ordered by this Court, and
3Page 8 then an additional 30 days for the SEC to review this discovery and conduct any remaining
depositions.
BACKGROUND
I.
The Proceedings Leading Up to The Consent Order
On June 5, 2023, the SEC filed its Complaint, alleging that Defendants violated the
federal securities laws through their operation of the Binance.US Platform and the Binance.com
Platform. (Compl., Dkt. No. 1.) On June 9, 2023, the SEC filed its TRO Motion, presenting
evidence of Defendants’ unlawful activities and the need for Court intervention to protect the
assets of U.S. investors under the control of the Binance Entities. (Dkt. No. 56.) The SEC
requested, inter alia, an asset freeze of BAM’s company assets, the repatriation and other
specified relief concerning the custody and control of Binance.US Platform “Customer Assets”;
expedited discovery; and other related relief. (Id.) In its TRO Motion and at the subsequent
hearing, the SEC presented extensive evidence that the Binance Entities had (1) maintained
significant control of the Binance.US Platform since the platform’s inception, as well as
Binance.US company and Customer Assets; (2) commingled funds from both Binance crypto
asset Platforms; and (3) recently moved large amounts of money outside of the United States.
(See id. at 58-66.)
At the TRO Motion hearing, the Court twice recognized that the evidence demonstrated,
“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.” (Ex. 1 at 79:18-21 (emphasis added); see also id.
at 57:12-15 (“But we do have considerable evidence of offshore transfers and we do have the
problem of the individual defendants’ ownership of the entities that own BAM Management.”).)
4Page 9 The parties ultimately agreed to a Consent Order that requires Defendants to repatriate all
Customer Assets and maintain them in the exclusive possession, custody, and control of BAM
employees, while allowing customer withdrawals. (Dkt. No. 71 at II.) The Consent Order
permits BAM to rely upon non-affiliated U.S.-based third parties to provide custody and related
services for Customer Assets, but prohibits BAM from transferring any of the assets or control
thereof to any of the Binance Entities. (Id.) To further ensure that the Binance Entities do not
maintain any control, such as through any copies of the prior Private and Administrative Keys
for the wallets holding customer and company assets, the Consent Order requires BAM to
establish and transfer Customer Crypto Assets to new wallets, with New Private and
Administrative Keys. (Id. at II.2.) The Consent Order also specifically orders that “[t]hese New
Private and Administrative Keys, will not be provided to or in any way shared with the Binance
Entities.” (Id.)
The Consent Order also contains various reporting and verified accounting provisions
regarding customers, accounts, and assets on the Binance.US and Binance.com platforms. (Id. at
IV.) In addition to this reporting, it permits the SEC to conduct expedited discovery, including
depositions, interrogatories, and document requests, of BAM’s third-party auditors and
custodians of assets concerning “Customer Assets and their possession, custody, control, transfer
or movement, security, segregation, availability, and any encumbrances that would make them
unavailable for transfer or withdrawal by customers . . . .” (Id. at V.1.)
II.
The SEC’s Efforts to Obtain Discovery Regarding Customer Assets
A.
The SEC’s Requests for Production and Interrogatories
On June 23, 2023, the SEC served its First Set of Requests for Production of Documents
and Inspection (“RFPs”) and First Set of Interrogatories (“Interrogatories”) on BAM (Exs. 2, 3.)
5Page 10 In accordance with the scope of discovery permitted under the Consent Order, the SEC sought,
among other things, discovery concerning Customer Assets, such as financial account and wallet
information; BAM’s policies, procedures, and controls relating to Customer Assets; and
information concerning the infrastructure, systems, and software relating to Customer Assets,
including Binance’s and Zhao’s involvement as to these core issues. (See id.) On June 30, the
SEC first met and conferred with BAM to discuss the SEC’s first set of discovery requests.
(Farer Decl. ¶ 7.) 3 BAM informed the SEC that it believed the SEC’s discovery requests were
overbroad and questioned the relevance of historic and other information. (Id.) BAM stated it
would present a proposed discovery plan based on the requests BAM deemed relevant that would
prioritize production of information about the current status of Customer Assets and include a
proposal to address some of the other issues. (Id.)
At BAM’s request, the SEC agreed to extend the response deadline in an effort to work
with BAM in good faith and facilitate a substantive production of documents and information.
(Farer Decl. ¶ 8.)
On July 5, BAM served its objections and responses to the RFPs though it did not
produce any documents. (Farer Decl. ¶ 9, Ex. 4.) From the outset, BAM’s primary objection
was and has been the burden purportedly imposed by the SEC’s discovery requests. (See, e.g.,
Exs. 4 at ¶¶ 2-8; 5.) BAM’s relevance objections were in large part limited to whether the SEC
is entitled to evidence concerning historical custody and control of Customer Assets. (See, e.g.,
Ex. 4 at ¶ 6; Ex. 5 at 3.) To address its objections, BAM’s July 5 letter proposed a “discovery
plan” that would divide BAM’s document productions in “priority” and “non-priority” items,
On June 21, during a discussion concerning issues relevant to the joint status report (see Dkt.
No. 87), the parties briefly discussed expedited discovery and what the SEC may want in
addition to the declarations BAM had filed in support of its opposition to the SEC’s TRO
Motion. (Farer Decl. ¶ 6.)
6Page 11 distinguished by whether it determined requests were related “to the current custody and control
of Customer Assets.” (Ex. 5 at 3.) The SEC has, from the outset, disputed BAM’s
characterization of any of its discovery requests as unrelated to Customer Assets or not a priority
to addressing the concerns the expedited discovery is intended to address. (Farer Decl. ¶ 11.)
On July 7, the parties conducted a meet and confer concerning BAM’s objections and
responses to the SEC’s RFPs and BAM’s proposed discovery plan. (Farer Decl. ¶ 12.) The SEC
explained that BAM’s interrogatory responses and information required under Section IV of the
Consent Order did not satisfy BAM’s production obligations in response to the RFPs, as BAM
proposed. (Id.) While the SEC maintained that BAM was required to produce documents in
response to all of the SEC’s RFPs, the SEC agreed to a rolling production of materials based on
the prioritization from BAM’s July 5 letter, as expanded during the meet and confer to include,
among other materials, the documents in response to Request 18 concerning Ceffu. (Id.; see Exs.
5, 8.)
On July 13, BAM served its objections and responses to the Interrogatories. (Ex. 6.) It
provided some limited information, such as identifying employees involved with Customer
Assets and key shard holder information, but it also lodged numerous objections and entirely
refused to answer five of the interrogatories. (Id., Interrog. Resp. Nos. 8-12 (objecting without
providing a response).)
Over the ensuing nearly two months, the SEC continued to press BAM on outstanding
relevant discovery in response to the SEC’s RFPs and Interrogatories, while also agreeing in
good faith to BAM’s multiple requests to extend interim deadlines. (Farer Decl. ¶ 14.) Since
then, the SEC has met and conferred with BAM’s counsel via telephonic conference and email
communications on at least a weekly basis, and on multiple occasions requested that BAM
7Page 12 provide a schedule of remaining productions, noting that a prolonged production schedule would
require extension of the expedited discovery period. (Id.; see, e.g., Exs. 7, 8.)
Nonetheless, as of July 24, BAM had only produced approximately 32 documents in
response to the RFPs, and 14 documents pursuant to their obligations to provide certain
information under Section IV of the Consent Order. (Farer Decl. ¶ 17.) During a July 24 meet
and confer, the SEC expressed its concerns with BAM’s discovery deficiencies as to timing,
scope, and format of production, including failure to complete the priority productions promised
on July 7. (Id. ¶ 18.) The SEC stressed the need to understand the relevant systems, software,
devices, and operational components, including the need for diagrams and other documents
describing the AWS environment, TSS protocol, related protocols, software, and technology.
(Id.) BAM represented that it had not been able to identify any such documents, suggesting
depositions may be the only method to obtain such information, and the SEC reiterated that, if
that was the case, an inspection may be the only option. (Id.)
And as further summarized below, BAM has made several concerning statements
regarding its custody and control of Customer Assets, including admitting to the involvement of
Binance Entities in creating wallets and key shards relating to BAM’s Customer Crypto Assets
and maintaining the AWS environment that hosts the wallet custody software. (Id. ¶ 19; Ex. 9.)
BAM has also made inconsistent statements about Ceffu’s and Binance’s involvement in these
matters, first claiming that Ceffu was BAM’s wallet custody software and services provider (see
Ex.10), but later stating that Binance is BAM’s wallet custody software provider (Farer Decl. ¶
19). As more follow explained below, these circumstances reinforce the need for discovery on
these topics.
8Page 13 i. Discovery concerning crypto asset wallet custody and “Ceffu”
The SEC’s RFPs and Interrogatories sought documents concerning BAM’s crypto asset
wallets, the role of third-party wallet custodians, such as BAM’s relationship with, and the
services provided by, a company called “Ceffu.” (See, e.g., Ex. 2, RFP Nos. 6, 18, & 20; Ex 3,
Interrog. Nos. Interrog. Resp. Nos. 15, 17, 22, 23, 24.) The specific request for documents
concerning Ceffu was based on a document BAM produced shortly before the SEC filed its TRO
Motion that stated that BAM “license[d] wallet custody software and support services from
Ceffu (previously Binance Holdings Limited)” and the “Ceffu solution makes up a majority of
our wallet technology.” (Ex. 10.)
BAM initially sought to defer Ceffu-related discovery as “non-priority,” asserting it was
“unrelated to the current custody and control of Customer Assets.” (Ex. 5.) However, given that
BAM’s policy identified Ceffu as providing “wallet custody software and support services,”
during a July 7 meet and confer, the SEC emphasized the need for this discovery, and BAM
agreed to prioritize it. (See Farer Decl. ¶ 12; Ex. 8.)
BAM finally provided information as to Ceffu in a letter on July 31, addressing the issue
in connection with SEC’s Interrogatory No. 22 and request for information concerning the
creation of the New Private and Administrative Keys and security protocols related to them.
(Ex. 11.) BAM admitted it had created new cold wallets, and that Ceffu, a Binance affiliate,
played a role in establishing New Private and Administrative Keys. (Id.) BAM nevertheless
refused to provide any documents about Ceffu’s role, stating: “The New Private and
Administrative Keys were created in consultation with Ceffu, and BAM submits that inquiries
concerning how Ceffu creates wallets should be directed to Ceffu.” (Id.) In other words, BAM
indicated that, contrary to the terms of the Consent Order, it may have entrusted a Binance Entity
9Page 14 with custody and control of its crypto assets and Customer Crypto Assets in violation of the
Consent Order—all the while refusing to provide any discovery about this relationship or how
the wallets and keys were created to ensure no Binance Entities had custody and control.
Given the admission of Ceffu’s involvement, as well as subsequent public information
the SEC obtained from Ceffu’s website about its third-party wallet custody service offerings and
registration with foreign-based Binance affiliates, on August 3, 2023, the SEC raised concerns to
BAM regarding Ceffu’s role in the custody and control of Customer Assets. (Farer Decl. ¶¶ 23,
25; Exs. 12, 13.) The SEC stressed that the Consent Order required the creation of new wallets
and private keys to address this very same lack of information about the preexisting wallets
created by Binance, and that BAM was prohibited from using a foreign Binance affiliated thirdparty for wallet custody services. (Farer Decl. ¶ 23.)
In response, BAM reversed course again. In an August 4 email, BAM agreed to provide
“any documents BAM has that are relevant to the Ceffu role in creating the new wallets for
Customer Crypto Assets (as required by Section II.2. of the Consent Order) and we will explain
what we understand the process to entail.” (Ex. 14, Aug. 4, 2023 email from J. Adler at 4:PM.) However, the additional information eventually provided only further heightened the
SEC’s concerns about Binance Entities’ control over its Customer Assets. During a meet and
confer that same day, BAM’s counsel explained that Binance markets its wallet custody software
to third parties as “Ceffu.” (Farer Decl. ¶ 27.) However, BAM’s wallet custody software had
not changed—it was the same wallet custody software licensed from Binance under the Software
License Agreement. (Id.) BAM further explained that BAM sometimes internally referred to the
wallet custody software solution as “Ceffu,” but that BAM’s wallet custody software solution
predated Binance’s commercial offering of “Ceffu” as a third-party wallet custodial solution.
10Page 15 (Id.; Ex. 9.) In other words, BAM suggested that Binance was providing the wallet services—as
it had been doing all along. (Farer Decl. ¶ 27.)
During that same August 4 meet and confer, BAM also agreed to provide additional
information about the Wallet Custody Agreement, the roles, responsibilities, and functions set
forth in the agreement, and the identification of Binance and other entities and individuals who
provide the services, including a detailed chronology with back-up documentation about the
evolution of the relationship with Binance through the termination of the agreement. (Farer
Decl. ¶ 28.) BAM further agreed to explain its position that the Wallet Custody Agreement was
purportedly “not operationalized” and therefore did not describe or govern the relationship
between BAM and Binance in providing wallet custody software and related services to BAM.
(Id.; see also Ex. 15 (memorializing request).)
In light of BAM agreeing to provide this information, the SEC sent a follow-up email the
next day, requesting from BAM specific information that would be responsive to BAM’s RFPs
concerning Ceffu, Binance.com, and the third-party custodians used by Binance.US for custody
and control of BAM and Customer Assets, including relevant infrastructure, system, technology
and related security information. (See Ex. 16.)
On August 14, 2023, BAM produced documents in response to the SEC’s August request. (See Ex. 9.) Although BAM’s counsel explained on August 4 that BAM was
continuing to use Binance software, BAM made a document production on August 14 production
in response to the SEC’s August 5 request that did not contain any information about Binance’s
provision of that software service to BAM, as BAM’s counsel had represented. (Id.; Farer Decl.
¶ 31.) Rather, the production included, in relevant part, a security report for a Ceffu predecessor,
Block Technologies, and a spreadsheet BAM identified as Ceffu’s answers to a questionnaire,
11Page 16 called the “Custody Solution Provider Security Questionnaire,” that BAM requires its custody
solution providers to fill out. (Id.) The questionnaire appears to cover, generally speaking,
policies and procedures related to the security of keys, among other things. (Id.; Exs. 9, 17.)
Notwithstanding this production of additional information relating to Ceffu’s
involvement in BAM’s wallet custody services, BAM’s Chief Security Officer, Erik Kellogg,
testified during his recent deposition that
. (Farer Decl. ¶ 34.a.) Further, documents recently produced by BAM’s auditor raise
questions about BAM’s representations concerning its wallet custody provider. These
documents refer to
. (Ex. 18.)
. (Id.) Kellogg testified during his deposition that
. (Farer Decl. ¶¶ 34.b.)
Even setting aside the confusion over whether it is Binance or Ceffu that is providing
BAM the wallet custody software provider, and despite being responsible for the security of
BAM’s crypto assets including Customer Assets, Kellogg testified that
12Page 17 . (Id. ¶ 34.c.)
Other than this everchanging and contradictory information, BAM has failed to provide
any additional information in response to the SEC’s repeated requests concerning Ceffu or
technical documentation or other evidence related to BAM’s infrastructure, systems, security
protocols, wallet custody software and the creation, custody, and control of the wallets and
private keys. BAM initially objected to the RFP’s overbreadth and otherwise claimed such
materials did not exist; however, during his deposition, Kellogg testified about
. (Farer Decl. ¶¶ 34.d, 35.) Therefore, it
is apparent that BAM has not conducted a reasonable search consistent with its discovery
obligations, including for such documents specifically referenced in the Proposed Order.
ii. Discovery concerning BAM’s communications
The RFPs seek BAM’s communications concerning Customer Assets and related topics.
(See, e.g., Ex. 2, RFP Nos. 1-6, 9, 10, 11, 14, 15, 18-28, 30-33, and 38.) From the outset, BAM
has maintained that the SEC’s requests for any “communications” is overly broad despite their
relevance to the Consent Order. (See Exs. 4, 5 at 1.) The SEC has repeatedly attempted to
negotiate an acceptable scope to its requests. For example, on August 2 the SEC proposed as a
starting point that BAM produce responsive communications from personnel the SEC noticed for
deposition. (Ex. 19.) Yet BAM never offered any counterproposal despite almost two months of
negotiations and, astonishingly, it has not produced any of the requested communications. (See
Ex. 22.) Rather, BAM’s position has been that the SEC is simply not entitled to such discovery,
asserting that “we have repeatedly stated that we believe a communications search in the context
13Page 18 of expedited discovery is inappropriate and unnecessary for your purposes.” (Ex. 22 at Aug. 10,
2023 email from M. Martens at 11:00 AM.)
To the contrary, the requested communications are essential to understanding the status
of Customer Assets and to the SEC’s efforts to ensure their safety and security. To illustrate,
BAM’s external auditor recently produced for the first time several documents and
communications between the auditor and BAM personnel that provide insight into various areas
relevant to the Consent Order, including representations BAM made to the auditor concerning
Ceffu’s role in BAM’s custodying of Customer Assets. (See, e.g., Ex. 18.) For example, BAM’s
external auditor produced a June 15, 2023 letter in which it raised
(Ex. 20.) And BAM’s external auditor testified that
. (Farer Decl. ¶ 33.a.) The external auditor, not BAM, has
produced the auditor’s June 15 letter. After multiple requests, BAM just produced
as this opposition was being finalized for filing, underscoring BAM Trading’s
lack of transparency during this expedited discovery period. (Farer Decl. ¶ 41.) The SEC did
not even learn of the existence of BAM’s auditor’s concerns expressed in its June letter until it
received the auditor’s document production in July 2023, and the SEC did not learn of
. (Id.) It is
therefore clear that BAM has had highly relevant communications relating to the Consent Order
that it has failed to produce to the SEC based on its blanket burden objections.
iii. Accounting documents and other financial information
In the RFPs and related meet and confer communications, the SEC sought certain BAM
accounting documents and financial information relating to Customer Assets including, as
relevant here: (1) BAM’s general ledgers that tracks deposits, trading, transfers, and
14Page 19 withdrawals; (2) certain bank account opening documents, including for new accounts within the
past few months, and documents sufficient to show authorized signatories on key financial
accounts; (3) trial balances; detailed monthly financial statements; and (4) documents concerning
the reconciliation performed between the accounting ledgers and the newly-created wallet
addresses that would show the movement of the customer crypto assets. (Ex. 2, RFP Nos. 6, 7,
8, 9, 16, 17, 20, 25, 32, 33 39; Ex. 15.)
To date, BAM has failed to produce information responsive to these RFPs. First, it
initially claimed that its production of documents pursuant to Part IV of the Consent Order,
including information showing balances of Customer Assets for each Customer as of a mutually
agreed date, and a general ledger as of that date was sufficient in evaluating whether BAM
maintained sufficient asset. 4 (See, e.g., Exs 4, 5; Farer Decl. ¶ 42.) In addition, BAM initially
produced only screenshots of certain bank account information (some of which were
unintelligible) and information prepared by counsel identifying account balances, owners, and
signatories to establish the account balances and authorized owners and signatories for fiat
accounts. (See, e.g., Ex. 21; Farer Decl. ¶ 42.) But that information is insufficient. (Farer Decl.
¶ 42.) During the July 7 and July 24 meet and confers and subsequent communications, the SEC
explained it needed more detailed financial information—based on documents or other
evidence—and beyond this snapshot in time to evaluate and verify the information provided
regarding its fiat and crypto asset holdings, expenses, and accounting and bank statement
information and ensure that Binance.US maintains sufficient assets, including such documents
and information identified herein. (Id.) While BAM has since provided certain bank account
The SEC is continuing to meet and confer with all Defendants concerning their respective
productions pursuant to Section IV of the Consent Order. The SEC reserves the right to seek
further relief from the Court if the parties are unable to resolve these issues.
15Page 20 information and represented it would produce at least some of the other categories of outstanding
materials, these requests remain outstanding. (See, e.g., Ex. 22.) Accordingly, the SEC
continues to seek critical financial information from BAM to assess whether it possesses assets
to satisfy customer liabilities, and that assets are appropriately controlled by BAM personnel in
the United States, as required under the Consent Order.
iv. The SEC’s request for inspection
Pursuant to Federal Rule of Civil Procedure 34(a)(2), the RFPs sought to inspect BAM’s
technological infrastructure relating to BAM’s holding of Customer Crypto Assets. (See Ex. 2.)
BAM objected, claiming, among other things, that an inspection is “administratively infeasible.”
(Ex. 4, Resp. to RFPs. at 30-31.)
BAM has provided no detail explaining its bare assertion that an inspection to assess its
software infrastructure is “administratively infeasible.” Nevertheless, as an attempt to
compromise, during the various meet and confers, the SEC requested diagrams and other
documents describing the relevant system architecture, infrastructure, systems, software, and
protocols, stressing that absent such information, an inspection may be the only option to obtain
the information necessary to evaluate the custody and control of Customer Assets. (Farer Decl. ¶
43; see, e.g., Exs. 15, 16.) BAM has responded that no such documents exist and has insisted
that Kellogg’s deposition would satisfy the SEC’s need for discovery on this issue. (Farer Decl.
¶ 43.) During Kellogg’s recent deposition, however, he confirmed that
,
16Page 21 . (See Farer Decl. ¶ 34.c.)
Thus, the SEC urgently requires discovery that, to date, BAM has failed to produce, concerning
Binance’s rights and access to these systems to further evaluate Defendants’ compliance with the
Consent Order. The requested inspection should, inter alia, everything that is identified,
documented, or diagramed in the documents about which Kellogg testified during his deposition.
(See e.g., Exs. 23-25.)
v. BAM’s Interrogatory responses
The SEC’s interrogatories ask for the following information that is encompassed by
within the Consent Order’s terms:
•
Relevant BAM personnel’s prior employment, compensation, or other relationship
with the Binance Entities (Interrog. Resp. Nos. 1-4);
•
Explanation as to BAM’s prior inconsistent representations regarding its Wallet
Custody Agreement with Binance (Interrog. Resp. No. 8);
•
Information concerning how BAM continues to receive the services set forth in the
Wallet Custody Agreement in light of its inconsistent statements about it (Interrog.
Resp. No. 9);
•
Identify all Documents and Communications Concerning internal or external audits of
the BAM Entities’ possession, custody, control, transfer or movement, security,
segregation, availability, and any encumbrances or limitations to its Customer Assets.
(Interrog. Resp. No. 10);
•
Information requested relating to the documents and information improperly withheld
as discussed above, including information about CEFFU, the wallet custody software
and related system architecture, infrastructure, and systems, and concerning the
17Page 22 establishment, control, and operation of the crypto asset wallets (Interrog. Resp. Nos.
15, 17, 22, 23, 24);
•
Updated information about current banking partners (Interrog. Resp. Nos. 6, 17);
•
Identify and describe in detail any agreement, relationship, affiliation, or association
between any of the Binance Entities and any Person with any access, possession,
authority, custody, or control of any Customer Assets, fiat or crypto assets of any of
the BAM Entities, or any account or wallet holding Customer Assets or the fiat or
crypto assets of any of the BAM Entities, including, but not limited to, the extent to
which any of the Binance Entities or Zhao has the authority over or the ability to
direct or instruct such Persons (Interrog. Resp. No. 15);
•
Identify and describe in detail all systems and Persons involved in the management of
any accounts, crypto asset wallets, Customer Assets, and fiat or crypto assets of the
BAM Entities (Interrog. Resp. No. 17);
•
Dates of all individuals’ possession, custody, or control of any Private and
Administrative Keys or New Private and Administrative Keys (Interrog. Resp. No. 2);
•
Information for new wallets created under the Consent Order, including the date
created, addresses, specific crypto assets held in each wallet, and holders of the New
Private and Administrative Keys (Interrog. Resp. No. 2, 6, 7, 16, 17, 19, 22; Dkt No.
71 at II.2); and
•
Information requested concerning crypto asset wallets for company and Customer
Assets (Interrog. Resp. No. 22).
To date, BAM has not provided this information. It has represented it would provide
information in response to certain requests but has not yet done so, and, for others, it either
objects to the relevance, refers generally to its productions for the information, or represents that
it will discuss internally and provide its position. In addition, the SEC requested that BAM
supplement its interrogatory responses with information set forth in various written attorney
correspondence and compilations of information. (See, e.g., Exs. 6, 22.) BAM agreed it would
provide certifications for responses in its July 31 letter, but it has not yet done so, and completely
fails to acknowledge other information provided through counsel in its August 14 and other
correspondence and productions. (See Ex. 22.) Over the course of weeks, the SEC has met and
18Page 23 conferred with BAM on numerous occasions, with multiple follow-up communications, pressing
on outstanding discovery, in a vain attempt to reach a compromise as to these issues. (Farer
Decl. ¶ 47.) But BAM has failed to respond or supplement its responses to the Interrogatories
even though none of its objections have merit. (Id.)
*
*
*
The SEC has attempted to resolve these and other discovery issues in good faith,
including by agreeing to multiple extensions of BAM’s deadlines under the Consent Order. (See,
e.g., BAM Mot. Extend Deadline Verified Written Accounting, Dkt. 94.) But BAM still refuses
to produce and provide relevant information. As of the date of this filing, BAM has only
produced a little over 220 documents. Many are unintelligible screenshots of bank account
information, documents without dates or signatures, and letters from counsel and tables that
appear to be prepared for purposes of this litigation, without any supporting evidence or
verification by an individual with knowledge confirming the accuracy of the information. B.
SEC’s Notice of Depositions
In objecting to the SEC’s RFPs on July 5, BAM asserted that various requests were
“more appropriate lines of inquiry for depositions,” and urged the SEC to “tak[e] advantage of
the availability of witnesses who are best positioned to answer your questions.” (Ex. 11 at 2.)
Accordingly, pursuant to the deadlines set forth in the Consent Order, on August 2, 2023, the
SEC noticed 14 BAM personnel for depositions, including BAM’s Chief Executive Office
(“CEO”) and Chief Financial Officer (“CFO”). (Ex. 19.) Even though the SEC lacked
significant document and written discovery from BAM, the SEC crafted a list of deponents based
As one reference point, in contrast, BAM’s external auditor has produced over 6,documents that primarily concern BAM’s custody and control of its assets, and that included
several documents BAM provided to its auditor but has not produced to the SEC.
19Page 24 the limited discovery the SEC had received that indicated that these deponents were: (1) BAM
personnel who hold “key shards” necessary to control the crypto asset wallets that hold the vast
majority of BAM’s company and customer assets; (2) involved in the custody of Customer
Assets; and/or (3) BAM senior officers with ultimate control of the company’s operations. (Id.)
BAM objected to the SEC’s deposition notice, unilaterally determining that it would
produce only the four witnesses that BAM deemed most appropriate without explaining why
other depositions the SEC noticed were improper. (Ex. 14 at Aug. 8, 2023 M. Martens email at
5:21 PM.) In response, the SEC agreed to narrow its initial list of deponents to six individuals
and noticed a Rule 30(b)(6) of BAM, while reserving the right to seek relief from the Court for
additional depositions. (Ex. 15 at Aug. 10 J. Murphy email at 7:43 PM.)
At no time did BAM provide specific objections to each of the noticed individuals, not
even as to BAM’s CEO and CFO during the parties’ meet and confer process. (See Exs. 14, 15.)
Instead, on August 14, BAM filed a Motion for a Protective Order (“PO Motion”), asking the
Court to quash the SEC’s request for production of relevant communications, limit the number of
depositions to the four individuals that BAM had self-selected—not to include the CEO and
CFO—and prevent the SEC from examining these witnesses on certain topics even though they
fall within the scope of expedited discovery outlined in the Consent Order. (Dkt. No. 95.)
As set forth more fully below, the SEC opposes the PO Motion and respectfully moves to
compel BAM to produce discovery, and for obtain related relief as further explained below.
LEGAL STANDARD
Under the Federal Rules of Civil Procedure (“Rules”), unless limited by court order,
“[p]arties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s
claim or defense and proportional to the needs of the case.” Fed. R. Civ. P. 26(b)(1). Relevance
20Page 25 is “construed broadly to encompass any matter that bears on, or that reasonably could lead to
other matters that could bear on any party’s claim or defense.” Ronaldson v. Nat’l Assoc. of
Home Builders, No. 19-01034 CKK/DAR, 2020 WL 3259226, at *4 (D.D.C. June 3, 2020)
(internal citation and quotation marks omitted).
If a discovery request is relevant, the burden shifts to the objecting party to demonstrate
why it is not permissible; the party must state their objections and reasons with specificity, and
state whether responsive materials are being withheld based on that objection. Fed. R. Civ. P.
34(b)(2)(B), (C); Athridge v. Aetna Casualty & Surety Co., 184 F.R.D. 181, 191 (D.D.C. 1998).
Rule 37 permits a party seeking relevant discovery to move to compel discovery from any party
who fails to respond to discovery. See, e.g., Breiterman v. United States Capitol Police, F.R.D. 24, 27-28 (D.D.C. 2018).
Similarly, when a party moves for a protective order from discovery, it must demonstrate
“good cause” as to why the order is appropriate. Fed. R. Civ. P. 26(c). To show good cause,
“the movant must articulate specific facts to support its request and cannot rely on speculative
conclusory statements.” Tequila Centinela, S.A. de C.V. v. Bacardi & Co. Ltd., 242 F.R.D. 1, (D.D.C. 2007). Rather, the responding party must show how a discovery request is overly broad
or unduly burdensome “by submitting affidavits or offering evidence which reveals the nature of
the burden.” Id. at 10 (internal citation and quotation marks omitted). Failure to meet these
requirements constitutes a waiver of such objections. Ronaldson, 2020 WL 3259226 at *5. “In
deciding whether or not to grant a protective order, courts typically weigh the burdensomeness to
the moving party against the need for, and the relevant of, the information being sought.” Id.
21Page 26 ARGUMENT
The Court should grant the SEC’s Motion and deny BAM’s PO Motion. BAM has
unreasonably and unilaterally sought to limit the Consent Order’s expedited discovery
provisions, despite its continued failures in making credible assertions about the custody of
Customer Assets. This Court should reject BAM’s attempts to deny the SEC the discovery
necessary to verify the safety and security of those assets, which are issues that lie at the heart of
the Consent Order.
I.
The Court Should Compel Defendants to Comply With The Consent Order’s
Expedited Discovery Provisions
Despite the SEC’s good faith efforts to agree to a reasonable scope of the discovery
sought during the expedited discovery process, BAM has continued to take unreasonable
positions that are contrary to the Consent Order’s grant of expedited discovery to the SEC. This
Court should grant the SEC’s motion to compel as to several areas of discovery.
First, this Court should order BAM to conduct a reasonable search for documents
regarding Ceffu, the wallet software services BAM uses, and all other Binance affiliates involved
in providing such services. In particular, BAM has been unable to credibly explain its own
relationship with Ceffu, including the extent to which it is owned and controlled by Binance or
Zhao. And whether the entity involved is Binance, Ceffu, or another Binance Entity,
Defendants’ compliance with the Consent Order is in question because the limited information it
has produced to date reveals that BAM remains reliant on Binance for the custody of Customer
Assets. Indeed, Kellogg repeatedly equated Binance’s role with that of the non-affiliated thirdparty custodians expressly authorized in the Consent Order – despite the Consent Order’s
requirement (Section I) that BAM have “complete control” over Customer Assets and can only
rely upon non-affiliated third-party custodians located in the United States for wallet custody and
22Page 27 related services. (See Farer Decl. ¶ 34.e.) Thus, BAM should conduct a reasonable search for
responsive documents and communications concerning any Binance Entity, including but not
limited to Ceffu, providing wallet custody software and related services and further discovery
regarding the technical architecture, infrastructure, systems, software, controls, and access as set
forth in the Proposed Order.
Second, this Court should order BAM to produce communications (including with its
auditor) regarding the custody, control, and availability of Customer Assets. The SEC has
repeatedly offered to confer on a reasonably limited search, most recently offering to limit its
request to the noticed deponents concerning the topics responsive to the SEC’s Requests relevant
topics over a period of months. (See Exs. 14, 15.) Yet BAM has persisted in claiming that any
such discovery is unwarranted, stating that “we have repeatedly stated that we believe a
communications search in the context of expedited discovery is inappropriate and unnecessary
for your purposes.” (Ex. 22.)
BAM’s position is untenable in any case, let alone here where BAM’s limited disclosures
have resulted in conflicting accounts of key events, as explained herein and in the TRO Motion.
(TRO Mot. at 32-33). 6 And Kellogg testified about
. (Farer Decl. ¶ 34.f.) Similarly, BAM’s external
auditor has recently produced and testified to
It is also inconsistent with this Court’s Order in which it observed it had “already authorized
the SEC to engage in the extensive early discovery” pursuant to the Consent Order. (Dkt. No.
88.)
23Page 28 . (Farer Decl. ¶ 31.) These developments alone require BAM to
explain its failure to search for such communications and remedy its failures. Moore v.
Napolitano, 723 F. Supp. 2d 167, 173 (D.D.C. 2010) (“Once a plaintiff uncovers such evidence
that the defendant failed to search in particular locations or that individual searches conducted by
the defendant’s agents were inconsistent, it necessarily falls to the defendant, the party with
superior knowledge of its own records, to show the reasonableness of its decisions regarding
where and how to search for responsive documents.”).
BAM’s arguments to the contrary are unpersuasive. BAM makes only vague (and
implausible) burden assertions while failing to convey the context of the parties’ discussions
described above or provide further specificity about the nature of any burden as required.
Indeed, other than the August 18 letter produced right before this filing, BAM has not even
produced
, a request that cannot plausibly be characterized as burdensome. BAM’s general
complaint that “complying with the SEC’s requests would likely take months or longer and come
with significant and unwarranted expense,” (BAM Mot. 14), is insufficient and constitutes a
waiver of such objection. Tequila Centinela, S.A. de C.V., 242 F.R.D. 1, at 8 (“the Court only
entertains an unduly burdensome objection when the responding party demonstrates how the
document is ‘overly broad, burdensome, or oppressive, by submitting affidavits or offering
evidence which reveals the nature of the burden”) (internal citation and quotation marks
omitted). Accordingly, this Court should order BAM to conduct a reasonable search for
communications responsive to its RFPs as further detailed in the attached proposed order.
24Page 29 Third, the Court should order BAM to produce accounting documents and other financial
information it has so far refused to produce. BAM has either declined or so far has yet to
produce general ledgers as of end of second quarter 2023, bank account opening documents, and
documents sufficient to show authorized signatories on the accounts, but they are crucial to
testing BAM’s assertions that Customer Assets and BAM’s assets are safe, secure, appropriately
segregated, and ready for immediate customer withdrawal. BAM has provided nothing but
vague and general objections as to why its productions to date, which are wholly insufficient, are
appropriate substitutes for this discovery. For example, BAM produced bank account
information in snapshot form, without providing additional documents that reflect the activity in
the account over time, which could enable the SEC to further test the sources and uses of BAM’s
funds. 7 Further, production of the signatory information would provide critical information
concerning who controlled these accounts.
Fourth, the Court should order BAM to make its systems and personnel available for
inspection so that the SEC may conduct an inspection of BAM’s crypto wallet architecture and
systems, or at a minimum, as an initial matter, produce diagrams and infrastructure, systems,
software, protocols, controls, and access information, including those set forth specifically in the
Proposed Order and requested during Kellogg’s deposition. Whether to permit an inspection is
within the court’s discretion, and “the court must balance the respective interests by weighing the
BAM has also continued to refuse to produce discovery pursuant to the SEC’s data delivery
standards. (Ex 22.) This refusal violates Federal Rule of Civil Procedure 34(b)(2)(E) and further
demonstrates BAM’s unreasonableness. The documents BAM has produced do not comply with
data delivery standards because do not contain relevant accompanying information that would be
included in a proper production of electronic documents, such as cover communications or
attachments or metadata identifying the source, custodian, file name, date, author, and revision
history. Accordingly, BAM should be ordered to produce (or reproduce) documents consistent
with SEC data delivery standards.
25Page 30 degree to which the proposed inspection will aid in the search for truth” against the “burdens and
dangers created by the inspection.” Welzel, 233 F.R.D. at 186 (internal citation and quotation
marks omitted). Inspections have been permitted in cases where the location to be inspected
relates to the subject matter of the action, but also where information is sought for background or
corroboration of witness testimony. Id. (and citing cases). Given the questions and
inconsistencies raised by BAM’s own representations and the testimony of its personnel about
the Binance Entities’ access to and control of those systems, an inspection is appropriate to
permit the SEC to observe the system operating in real time and understand its permissions and
controls. BAM has not made any credible argument that such an inspection would impose an
unreasonable burden. Further, as discussed herein, when the SEC sought to find alternative
discovery methods to get discovery on this issue, such as obtaining diagrams or other documents
reflecting how this infrastructure operates, BAM claimed it did not possess such documents, only
to have those assertions contradicted by documents produced by its external auditor or in
Kellogg’s testimony. 8 Absent at least a complete production of diagrams or other documents
and information describing how the infrastructure, systems, software, and protocols governing
BAM’s company and Customer Assets and the wallet custody software and services provided by
a Binance Entity, the requested inspection is warranted.
Fifth, this Court should order BAM to supplement its responses to its Interrogatories to
provide the information identified in Section II.A.v, above. These topics are appropriate and
tailored to the issues ripe for discovery under the Consent Order. Under Rule 33, a “party to
BAM also contradicts itself in claiming that further discovery is unnecessary due to the
“enormous amount of documents and information concerning BAM’s asset custody practices”
that BAM produced in the SEC’s investigation that preceded the Complaint. (BAM PO Mot. at
8; see also id. at 18). Those documents almost exclusively concern BAM’s historical practices –
which BAM now takes the erroneous position are fully outside the Consent Order’s scope.
26Page 31 whom an interrogatory is propounded must provide true, explicit, responsive, complete, and
candid answers.” English v. Wash. Metropolitan Area Transit Auth., 323 F.R.D. 1, 8 (2017)
(citation and internal quotation marks omitted). Where a party provides business records instead
of preparing a narrative written response to an interrogatory, the response must specify the
records in sufficient detail to enable the interrogating party to locate them and identify them “as
readily as the responding party could,” and such records must provide a complete response if
further narrative response is provided. Id. at 18 (internal citation and quotation marks omitted).
BAM’s responses have fallen short of these basic requirements, failing to provide relevant
responses on issues concerning critical issues such as its wallet custody practices, and BAM
personnel’s prior affiliations with Binance Entities. Nor has BAM and it has offered no
reasonable basis for refusing to provide fulsome, verified responses on these relevant issues.
Accordingly, the SEC’s Motion to Compel should be granted in its entirety.
II.
The Court Should Deny BAM’s PO Motion and Allow the SEC to Depose BAM’s
CEO, CFO, and the Additional Witnesses the SEC Identified for Deposition
BAM moves for a protective order to limit the SEC’s ability to take depositions beyond
the four BAM witnesses that BAM offered, and to prohibit the SEC from deposing BAM’s
current CEO, Brian Shroder, and CFO, Jasmine Lee. The Court should deny BAM’s PO Motion.
A.
The SEC Should Be Permitted to Depose BAM’s CEO and CFO
The SEC alleges that Binance and Zhao created BAM to operate the Binance.US
Platform as part of their broader scheme to evade U.S. regulatory oversight while profiting off of
U.S. capital markets. (Compl. ¶¶ 143-208.) As part of that plan, Binance and Zhao controlled
BAM, including the custody of Customer Assets. (Id.) BAM’s first two CEOs failed in their
attempts to get more independence from Binance and Zhao. In fact, in August 2021, BAM’s
second CEO (named as “BAM CEO B” in the Complaint) decided to quit because Zhao “was the
27Page 32Page 33Page 34 regarding an entirely different test applied to depositions of senior government officials, willfully
ignoring that the “apex doctrine” referred to in those cases requires a showing of “extraordinary
circumstances” based on policy concerns inapplicable here. See United States v. Newman, F. Supp. 3d 181, 188 (D.D.C. 2021) (discussing the concerns underlying the “apex doctrine”
applied to senior government officials, including the need to protect the “integrity and
independence of the government’s decision-making processes.”). BAM’s cited cases show that
to the extent an “extraordinary circumstances” standard applies in this context, it is a showing
BAM must make in arguing why the depositions should not be permitted. Celerity, Inc. v. Ultra
Clean Holding, Inc., No. C 05-4374, 2007 WL 205067, at *5 (N.D. Cal. Jan. 25, 2007) (“[i]t is
very unusual for a court to prohibit the taking of a deposition altogether and absent extraordinary
circumstances, such an order would likely be in error.”) (quotation omitted).
Accordingly, BAM fails to demonstrate good cause to grant a protective order concerning
the SEC’s noticed depositions of Shroder and Lee.
B.
The Court Should Deny BAM’s Motion for Protective Order as to the
Number of Depositions and Allow the SEC to Depose Identified Witnesses
BAM further seeks a protective order “limiting the SEC to four depositions of BAM
employees.” PO Mot. at 2. The Court should reject BAM’s position and allow the SEC to take
the depositions necessary to address the relevant issues under the Consent Order.
Specifically, the SEC asks that the Court to deny BAM’s PO Motion and compel BAM to
produce for deposition the witnesses identified in Exhibit 31, that contains a description of the
relevance of each witness. 11 Each of these witnesses is critical to the issues that are at the core of
expedited discovery, including BAM’s compliance with the Consent Order. For example,
The SEC filed Exhibit 31 under seal given the security issues associated with the identification
of shard holders.
30Page 35 BAM’s current and former wallet key shard holders are of critical importance to the custody and
control of crypto assets totaling over $2 billion, and Defendants have failed to provide any
appropriate basis for their objection to the deposition of more than one shard holder. They have
not and cannot explain how one shard holder could speak to the other shard holders’ experience,
including security of the device that holds the shard and signing to approve transactions, the
relationship with or any level of control by Defendants Binance or Zhao, and their respective
compliance with the requirements of the Consent Order. All of this information—which is
unique to each individual shard holder—is necessary to confirm that the assets truly are within
the custody and control of BAM personnel in the United States and are being handled
appropriately. Further, the SEC seeks depositions of key employees who work on BAM’s
“Clearing” and “Treasury” teams, who are involved in the custody and transfer of Customer
Assets, to test whether BAM’s processes comply with the Consent Order, including whether
Binance and Zhao have any influence or control over those operations. BAM’s response is that the four witnesses it identified should suffice, and that the SEC
should not be permitted anything more given the evidence BAM claims it already produced.
(Dkt. No. 95 at 5-9.) As explained above, however, BAM’s compliance with the expedited
discovery process has been woefully inadequate, and raises substantial questions about BAM’s
custody and control of Customer Assets, including whether it is currently in violation of the
Consent Order. Thus, the SEC should be permitted to take depositions of BAM personnel that it
believes warranted. BAM cites no authority to the contrary.
The SEC has also issued deposition notices to Binance and Zhao but has agreed to continue to
meet and confer as to those depositions (along with other discovery requests) until the discovery
disputes between the SEC and BAM now before the Court are resolved. In addition, the SEC
reserves its right, under the Consent Order, to seek the depositions of other witnesses as it
obtains additional discovery from any of the Defendants.
31Page 36 The SEC therefore respectfully requests that this Court deny BAM’s PO Motion to
permit the SEC to depose the list of witnesses identified in Exhibit 31. III.
The Court Should Extend the Expedited Discovery Period
Pursuant to Rule 6(b), the court may for good cause extend the time in which an act must
be done “with or without motion or notice if the court acts, or if the request is made, before the
original time or its extension expires.” Here, there is good cause to extend the expedited
discovery period. Despite the SEC’s diligence in attempting to obtain the relevant discovery,
including engaging in weeks of discussions with BAM to resolve numerous outstanding issues,
BAM’s stonewalling and consistent delays necessitate an extension of time to complete
outstanding discovery. Notwithstanding the additional time the SEC has agreed to extend BAM
as to almost every deadline under the Consent Order, when the SEC has reiterated that these
extensions will likely necessitate an extension of the expedited discovery period, and the
inordinate amount of time the SEC has spent following up on outstanding requests, BAM has
Given BAM’s numerous discovery failures as described herein, the SEC has discussed
whether BAM and the other Defendants would agree to extent the 90-day time period for
expedited discovery pursuant to Paragraph V.1 of the Consent Order. BAM has informed SEC
counsel that it opposes any time extension. The SEC, Binance, and Zhao have separately agreed
to an extension of the expedited discovery period as to those two Defendants. Specifically, the
SEC, Binance, and Zhao have agreed to suspend the 45-day discovery period as to those two
Defendants (Consent Order V.1) and begin a 45-day discovery period the day after either (1) the
Court enters an order denying the SEC’s motion to compel and granting BAM’s motion for
protective order or (2) the date upon which the Court orders BAM to comply with the SEC’s
discovery requests. During that suspended time period, the SEC agrees it will not serve any
additional discovery requests on Binance or Zhao, but the parties agree to meet and confer in
good faith on Binance’s and Zhao’s objections to all discovery and deposition notices issued to
date. Further, Binance and Zhao will continue collecting documents and information during the
suspended time period, such that, on the first day the 45-day discovery period begins as set forth
above, Binance and Zhao will begin producing documents in response to the SEC’s document
requests, serve responses to the SEC’s interrogatories, and be prepared to set dates for
depositions, or, alternatively, file a motion for protective order. Further, the SEC, Binance, and
Zhao have reserved the right to move the Court on additional discovery motions concerning any
discovery disputes that become ripe after the 45-day period resumes.
32Page 37 been wholly delinquent in satisfying its discovery obligations under the Consent Order and the
Federal Rules.
Thus, the SEC respectfully requests that if the Court grants the SEC’s Motion in whole or
in part, that it 1) require the production of any additional discovery be substantially completed
within 14 days of its order, and 2) extend the expedited discovery period as to BAM for a period
of 30 days beyond the date that BAM confirms it has substantially completed its document
productions consistent with the Court’s Order. 14 This extended period strikes the appropriate
balance in providing sufficient time to resolve outstanding issues while aligning as much as
possible to the scope and timing of expedited discovery under the Consent Order.
CONCLUSION
For these reasons, the Court should grant the SEC’s Motion, deny the BAM Defendants’
Motion for Protective Order, and order the other relief the SEC seeks in accordance with the
Proposed Order attached hereto.
Dated: August 28,
Respectfully submitted,
/s/Jennifer L. Farer
Matthew Scarlato (D.C. Bar No. 484124)
Jennifer L. Farer (D.C. Bar No. 1013915)
J. Emmett Murphy
David A. Nasse (D.C. Bar No. 1002567)
Jorge G. Tenreiro
SECURITIES AND EXCHANGE COMMISSION
(202) 551-5072 (Farer)
farerj@sec.gov
Attorneys for Plaintiff
If the SEC disagrees that BAM has substantially completed its production, the SEC reserves
the right to raise the issue with the Court if the parties cannot resolve the issue themselves.
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Case 1:23-cv-01599-ABJ-ZMF Document 110-9 Filed 09/14/23 Page 1 of 37
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
__________________________________________
)
SECURITIES AND EXCHANGE
)
COMMISSION,
)
)
Plaintiff,
)
)
v.
)
No. 1:23-cv-01599-ABJ-ZMF
)
BINANCE HOLDINGS LIMITED,
)
BAM TRADING SERVICES INC.,
)
BAM MANAGEMENT US HOLDINGS
)
INC., AND CHANGPENG ZHAO,
)
)
Defendants.
)
__________________________________________)
PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S
MEMORANDUM IN SUPPORT OF ITS MOTION TO
COMPEL AND FOR OTHER RELIEF AND OPPOSITION
TO THE BAM DEFENDANTS’ MOTION FOR A PROTECTIVE ORDER
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TABLE OF CONTENTS
PRELIMINARY STATEMENT ................................................................................................. 1
BACKGROUND ........................................................................................................................... 4
I.
The Proceedings Leading Up To The Consent Order ................................................... 4
II.
The SEC’s Efforts to Obtain Discovery Regarding Customer Assets ......................... 5
A.
B.
The SEC’s Requests for Production and Interrogatories ................................. 5
i.
Discovery concerning crypto asset wallet custody and “Ceffu” ................ 9
ii.
Discovery concerning BAM’s communications ........................................ 13
iii.
Accounting documents and other financial information ........................... 14
iv.
The SEC’s request for inspection.............................................................. 16
v.
BAM’s Interrogatory responses ................................................................ 17
SEC’s Notice of Depositions ............................................................................... 19
LEGAL STANDARD ................................................................................................................. 20
ARGUMENT ............................................................................................................................... 22
I.
The Court Should Compel Defendants to Comply With The Consent Order’s
Expedited Discovery Provisions..................................................................................... 22
II.
The Court Should Deny BAM’s PO Motion and Allow the SEC to Depose BAM’s
CEO, CFO, and the Additional Witnesses the SEC Identified for Deposition ......... 27
A.
The SEC Should Be Permitted to Depose BAM’s CEO and CFO ................. 27
B.
The Court Should Deny BAM’s Motion for Protective Order as to the
Number of Depositions and Allow the SEC to Depose Identified Witnesses............. 30
III.
The Court Should Extend the Expedited Discovery Period........................................ 32
CONCLUSION ........................................................................................................................... 33
ii
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TABLE OF AUTHORITIES
Cases
Affinity Labs of Tex. v. Apple, Inc.,
No. C 09-4436 CW JL, 2011 WL 1753982 (N.D. Cal. May 9, 2011) .............................. 29
Athridge v. Aetna Cas. & Sur. Co.,
184 F.R.D. 181 (D.D.C. 1998).......................................................................................... 21
Breiterman v. United States Capitol Police,
324 F.R.D. 24 (D.D.C. 2018)............................................................................................ 21
Celerity, Inc. v. Ultra Clean Holding, Inc.,
No. C 05-4374 MMC (JL), 2007 WL 205067 (N.D. Cal. Jan. 25, 2007) ................... 29, 30
English v. Wash. Metro. Area Transit Auth.,
323 F.R.D. 1 (D.D.C. 2017).............................................................................................. 26
Moore v. Napolitano,
723 F. Supp. 2d 167 (D.D.C. 2010) .................................................................................. 24
Reif v. CNA,
248 F.R.D. 448 (E.D. Pa. 2008) ........................................................................................ 29
Ronaldson v. Nat’l Assoc. of Home Builders,
No. 19-01034 CKK/DAR, 2020 WL 3259226 (D.D.C. June 3, 2020)............................. 21
Salter v. Upjohn Co.,
593 F.2d 649 (5th Cir. 1979) ............................................................................................ 29
In re Ski Train Fire of Nov. 11, 2000 Kaprun Austria,
No. MDL 1428(SAS)THK, 2006 WL 1328259 (S.D.N.Y. May 16, 2006) ..................... 29
Tequila Centinela, S.A. de C.V. v. Bacardi & Co., Ltd.,
242 F.R.D. 1 (D.D.C. 2007).................................................................................. 21, 22, 24
United States v. Newman,
531 F. Supp. 3d 181 (D.D.C. 2021) .................................................................................. 30
Welzel v. Berstein,
233 F.R.D. 185 (D.D.C. 2005).......................................................................................... 26
Wilson v. DNC Servs. Corp.,
831 F. App’x 513 (D.C. Cir. 2020) ................................................................................... 29
iii
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Rules
Fed. R. Civ. P. 26 .......................................................................................................................... 21
Fed. R. Civ. P. 33 .......................................................................................................................... 27
Fed. R. Civ. P. 34 .............................................................................................................. 15, 21, 25
iv
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PRELIMINARY STATEMENT
On June 17, 2023, the Court entered a Consent Order (Dkt. No. 71) in which all of the
Defendants—including BAM Trading Inc. and BAM Management US Holdings Inc. (together,
“BAM”)—agreed to provide expedited discovery and other relief relating to the custody,
security, and availability of U.S. customer assets and those of BAM itself. That Consent Order
followed the Court’s express recognition of the “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.” (See “Farer Decl.” ¶ 3, Ex. 1, at 79:17-21.) 1
Critically, the Consent Order required that all Customer Assets—to include all existing
and New Private and Administrative Keys relating to BAM’s Customer Crypto Assets and root
access associated with the Amazon Web Services (“AWS”) account(s) for the Binance.US
Platform—be solely in BAM’s custody and “complete control” in the United States, absent an
express exception, and “not be provided to or in any way shared with the Binance Entities.”
(Dkt. No. 71 at I, II.2.) 2
More than two months later and despite repeated good faith attempts by the SEC to reach
further compromise with BAM, the SEC finds itself essentially where it was when it first sought
relief from the Court. BAM continues to refuse, even in light of the Consent Order, to provide
anything beyond extremely limited information to ensure that BAM’s Customer Assets are not at
the mercy of Defendants Binance Holdings Limited (“Binance”) and Changpeng Zhao, two
persons who view themselves outside the reach of the Court. To the contrary, the limited
1
“Farer Decl.” refers to the Declaration of Jennifer Farer submitted in further support of the
SEC’s Motion to Compel and Opposition to the BAM Defendants’ Motion for a Protective
Order. Exhibits to the Farer Declaration are hereafter cited as “Ex.”
2
“Customer Assets,” “New Private and Administrative Keys,” “Customer Crypto Assets,” and
“Binance Entities” are defined in Sections I and II of the Consent Order. (Dkt. No. 71.)
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discovery BAM has provided to date raises questions about whether Defendants are in violation
of the Consent Order because Binance Entities, including a newly rebranded Binance Entity
called “Ceffu,” appear to have control of Customer Assets through their role in the establishment
of wallets and keys shards related to BAM Customer Crypto Assets and control of the AWS
environment that hosts the wallet custody software and stores the keys for BAM company and
Customer Assets.
Accordingly, while the SEC is mindful of seeking the Court’s intervention, immediate
production of the requested discovery is essential to determine not only whether Customer
Assets are being safeguarded in the manner agreed to by the parties and contemplated by the
Court in the Consent Order, but whether it may be appropriate for the SEC to seek an order to
show cause why BAM should not be held in contempt of that Order.
Following entry of the Consent Order, the SEC issued discovery requests focused on
information sufficient to provide assurances that all customer and BAM assets are properly
accounted for, within BAM’s exclusive control in the United States, available for withdrawal to
satisfy customer liabilities, and not subject to control by Binance Entities. BAM has produced
only approximately 220 documents, many of which relate to reporting otherwise required under
the Consent Order, and many that consist of unintelligible screenshots and documents without
dates or signatures. Further, BAM has refused to produce essential witnesses for deposition,
instead agreeing only to four depositions of witnesses it has unilaterally deemed appropriate. It
has responded to requests for relevant communications with blanket objections and has refused
to produce documents kept in the ordinary course of its business, claiming those documents do
not exist, only for the SEC to later receive such documents from other sources.
2
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The circumscribed discovery that BAM has produced to date has not alleviated the
concerns that led to the entry of the Consent Order at the outset of this action. Defendants still
cannot credibly explain the continued role of the Binance Entities in the custody and control of
BAM’s crypto assets and Customer Crypto Assets or provide credible evidence that BAM
personnel maintain sole possession, custody, and control of BAM company and Customer Assets
in the United States. BAM, for example, initially refused to provide information concerning
Ceffu, claiming such discovery was “unrelated to the current custody and control of Customer
Assets,” but later admitted that Ceffu had created BAM’s new crypto asset cold wallets and New
Private and Administrative Keys, and simply referred the SEC to Ceffu to obtain information on
how Ceffu created BAM’s wallets. Further, the SEC’s recent deposition of BAM’s Chief
Information Security Officer only increased the SEC’s concerns; he testified that
but he had no knowledge about
, could not identify the
, and confirmed that
.
Because BAM has refused to provide meaningful discovery regarding the safety and
security of customer and BAM assets, and because its conduct has resulted in delay, the SEC
respectfully requests that the Court (1) order BAM to produce responsive documents,
communications, information, and inspection access, as more fully set forth herein and in the
attached Proposed Order; (2) deny BAM’s Motion for a Protective Order; and (3) extend the
period for expedited discovery to permit BAM 14 days from the Court’s order on the pending
discovery motions to substantially complete any additional discovery ordered by this Court, and
3
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then an additional 30 days for the SEC to review this discovery and conduct any remaining
depositions.
BACKGROUND
I.
The Proceedings Leading Up to The Consent Order
On June 5, 2023, the SEC filed its Complaint, alleging that Defendants violated the
federal securities laws through their operation of the Binance.US Platform and the Binance.com
Platform. (Compl., Dkt. No. 1.) On June 9, 2023, the SEC filed its TRO Motion, presenting
evidence of Defendants’ unlawful activities and the need for Court intervention to protect the
assets of U.S. investors under the control of the Binance Entities. (Dkt. No. 56.) The SEC
requested, inter alia, an asset freeze of BAM’s company assets, the repatriation and other
specified relief concerning the custody and control of Binance.US Platform “Customer Assets”;
expedited discovery; and other related relief. (Id.) In its TRO Motion and at the subsequent
hearing, the SEC presented extensive evidence that the Binance Entities had (1) maintained
significant control of the Binance.US Platform since the platform’s inception, as well as
Binance.US company and Customer Assets; (2) commingled funds from both Binance crypto
asset Platforms; and (3) recently moved large amounts of money outside of the United States.
(See id. at 58-66.)
At the TRO Motion hearing, the Court twice recognized that the evidence demonstrated,
“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.” (Ex. 1 at 79:18-21 (emphasis added); see also id.
at 57:12-15 (“But we do have considerable evidence of offshore transfers and we do have the
problem of the individual defendants’ ownership of the entities that own BAM Management.”).)
4
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The parties ultimately agreed to a Consent Order that requires Defendants to repatriate all
Customer Assets and maintain them in the exclusive possession, custody, and control of BAM
employees, while allowing customer withdrawals. (Dkt. No. 71 at II.) The Consent Order
permits BAM to rely upon non-affiliated U.S.-based third parties to provide custody and related
services for Customer Assets, but prohibits BAM from transferring any of the assets or control
thereof to any of the Binance Entities. (Id.) To further ensure that the Binance Entities do not
maintain any control, such as through any copies of the prior Private and Administrative Keys
for the wallets holding customer and company assets, the Consent Order requires BAM to
establish and transfer Customer Crypto Assets to new wallets, with New Private and
Administrative Keys. (Id. at II.2.) The Consent Order also specifically orders that “[t]hese New
Private and Administrative Keys, will not be provided to or in any way shared with the Binance
Entities.” (Id.)
The Consent Order also contains various reporting and verified accounting provisions
regarding customers, accounts, and assets on the Binance.US and Binance.com platforms. (Id. at
IV.) In addition to this reporting, it permits the SEC to conduct expedited discovery, including
depositions, interrogatories, and document requests, of BAM’s third-party auditors and
custodians of assets concerning “Customer Assets and their possession, custody, control, transfer
or movement, security, segregation, availability, and any encumbrances that would make them
unavailable for transfer or withdrawal by customers . . . .” (Id. at V.1.)
II.
The SEC’s Efforts to Obtain Discovery Regarding Customer Assets
A.
The SEC’s Requests for Production and Interrogatories
On June 23, 2023, the SEC served its First Set of Requests for Production of Documents
and Inspection (“RFPs”) and First Set of Interrogatories (“Interrogatories”) on BAM (Exs. 2, 3.)
5
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In accordance with the scope of discovery permitted under the Consent Order, the SEC sought,
among other things, discovery concerning Customer Assets, such as financial account and wallet
information; BAM’s policies, procedures, and controls relating to Customer Assets; and
information concerning the infrastructure, systems, and software relating to Customer Assets,
including Binance’s and Zhao’s involvement as to these core issues. (See id.) On June 30, the
SEC first met and conferred with BAM to discuss the SEC’s first set of discovery requests.
(Farer Decl. ¶ 7.) 3 BAM informed the SEC that it believed the SEC’s discovery requests were
overbroad and questioned the relevance of historic and other information. (Id.) BAM stated it
would present a proposed discovery plan based on the requests BAM deemed relevant that would
prioritize production of information about the current status of Customer Assets and include a
proposal to address some of the other issues. (Id.)
At BAM’s request, the SEC agreed to extend the response deadline in an effort to work
with BAM in good faith and facilitate a substantive production of documents and information.
(Farer Decl. ¶ 8.)
On July 5, BAM served its objections and responses to the RFPs though it did not
produce any documents. (Farer Decl. ¶ 9, Ex. 4.) From the outset, BAM’s primary objection
was and has been the burden purportedly imposed by the SEC’s discovery requests. (See, e.g.,
Exs. 4 at ¶¶ 2-8; 5.) BAM’s relevance objections were in large part limited to whether the SEC
is entitled to evidence concerning historical custody and control of Customer Assets. (See, e.g.,
Ex. 4 at ¶ 6; Ex. 5 at 3.) To address its objections, BAM’s July 5 letter proposed a “discovery
plan” that would divide BAM’s document productions in “priority” and “non-priority” items,
3
On June 21, during a discussion concerning issues relevant to the joint status report (see Dkt.
No. 87), the parties briefly discussed expedited discovery and what the SEC may want in
addition to the declarations BAM had filed in support of its opposition to the SEC’s TRO
Motion. (Farer Decl. ¶ 6.)
6
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distinguished by whether it determined requests were related “to the current custody and control
of Customer Assets.” (Ex. 5 at 3.) The SEC has, from the outset, disputed BAM’s
characterization of any of its discovery requests as unrelated to Customer Assets or not a priority
to addressing the concerns the expedited discovery is intended to address. (Farer Decl. ¶ 11.)
On July 7, the parties conducted a meet and confer concerning BAM’s objections and
responses to the SEC’s RFPs and BAM’s proposed discovery plan. (Farer Decl. ¶ 12.) The SEC
explained that BAM’s interrogatory responses and information required under Section IV of the
Consent Order did not satisfy BAM’s production obligations in response to the RFPs, as BAM
proposed. (Id.) While the SEC maintained that BAM was required to produce documents in
response to all of the SEC’s RFPs, the SEC agreed to a rolling production of materials based on
the prioritization from BAM’s July 5 letter, as expanded during the meet and confer to include,
among other materials, the documents in response to Request 18 concerning Ceffu. (Id.; see Exs.
5, 8.)
On July 13, BAM served its objections and responses to the Interrogatories. (Ex. 6.) It
provided some limited information, such as identifying employees involved with Customer
Assets and key shard holder information, but it also lodged numerous objections and entirely
refused to answer five of the interrogatories. (Id., Interrog. Resp. Nos. 8-12 (objecting without
providing a response).)
Over the ensuing nearly two months, the SEC continued to press BAM on outstanding
relevant discovery in response to the SEC’s RFPs and Interrogatories, while also agreeing in
good faith to BAM’s multiple requests to extend interim deadlines. (Farer Decl. ¶ 14.) Since
then, the SEC has met and conferred with BAM’s counsel via telephonic conference and email
communications on at least a weekly basis, and on multiple occasions requested that BAM
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provide a schedule of remaining productions, noting that a prolonged production schedule would
require extension of the expedited discovery period. (Id.; see, e.g., Exs. 7, 8.)
Nonetheless, as of July 24, BAM had only produced approximately 32 documents in
response to the RFPs, and 14 documents pursuant to their obligations to provide certain
information under Section IV of the Consent Order. (Farer Decl. ¶ 17.) During a July 24 meet
and confer, the SEC expressed its concerns with BAM’s discovery deficiencies as to timing,
scope, and format of production, including failure to complete the priority productions promised
on July 7. (Id. ¶ 18.) The SEC stressed the need to understand the relevant systems, software,
devices, and operational components, including the need for diagrams and other documents
describing the AWS environment, TSS protocol, related protocols, software, and technology.
(Id.) BAM represented that it had not been able to identify any such documents, suggesting
depositions may be the only method to obtain such information, and the SEC reiterated that, if
that was the case, an inspection may be the only option. (Id.)
And as further summarized below, BAM has made several concerning statements
regarding its custody and control of Customer Assets, including admitting to the involvement of
Binance Entities in creating wallets and key shards relating to BAM’s Customer Crypto Assets
and maintaining the AWS environment that hosts the wallet custody software. (Id. ¶ 19; Ex. 9.)
BAM has also made inconsistent statements about Ceffu’s and Binance’s involvement in these
matters, first claiming that Ceffu was BAM’s wallet custody software and services provider (see
Ex.10), but later stating that Binance is BAM’s wallet custody software provider (Farer Decl. ¶
19). As more follow explained below, these circumstances reinforce the need for discovery on
these topics.
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i. Discovery concerning crypto asset wallet custody and “Ceffu”
The SEC’s RFPs and Interrogatories sought documents concerning BAM’s crypto asset
wallets, the role of third-party wallet custodians, such as BAM’s relationship with, and the
services provided by, a company called “Ceffu.” (See, e.g., Ex. 2, RFP Nos. 6, 18, & 20; Ex 3,
Interrog. Nos. Interrog. Resp. Nos. 15, 17, 22, 23, 24.) The specific request for documents
concerning Ceffu was based on a document BAM produced shortly before the SEC filed its TRO
Motion that stated that BAM “license[d] wallet custody software and support services from
Ceffu (previously Binance Holdings Limited)” and the “Ceffu solution makes up a majority of
our wallet technology.” (Ex. 10.)
BAM initially sought to defer Ceffu-related discovery as “non-priority,” asserting it was
“unrelated to the current custody and control of Customer Assets.” (Ex. 5.) However, given that
BAM’s policy identified Ceffu as providing “wallet custody software and support services,”
during a July 7 meet and confer, the SEC emphasized the need for this discovery, and BAM
agreed to prioritize it. (See Farer Decl. ¶ 12; Ex. 8.)
BAM finally provided information as to Ceffu in a letter on July 31, addressing the issue
in connection with SEC’s Interrogatory No. 22 and request for information concerning the
creation of the New Private and Administrative Keys and security protocols related to them.
(Ex. 11.) BAM admitted it had created new cold wallets, and that Ceffu, a Binance affiliate,
played a role in establishing New Private and Administrative Keys. (Id.) BAM nevertheless
refused to provide any documents about Ceffu’s role, stating: “The New Private and
Administrative Keys were created in consultation with Ceffu, and BAM submits that inquiries
concerning how Ceffu creates wallets should be directed to Ceffu.” (Id.) In other words, BAM
indicated that, contrary to the terms of the Consent Order, it may have entrusted a Binance Entity
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with custody and control of its crypto assets and Customer Crypto Assets in violation of the
Consent Order—all the while refusing to provide any discovery about this relationship or how
the wallets and keys were created to ensure no Binance Entities had custody and control.
Given the admission of Ceffu’s involvement, as well as subsequent public information
the SEC obtained from Ceffu’s website about its third-party wallet custody service offerings and
registration with foreign-based Binance affiliates, on August 3, 2023, the SEC raised concerns to
BAM regarding Ceffu’s role in the custody and control of Customer Assets. (Farer Decl. ¶¶ 23,
25; Exs. 12, 13.) The SEC stressed that the Consent Order required the creation of new wallets
and private keys to address this very same lack of information about the preexisting wallets
created by Binance, and that BAM was prohibited from using a foreign Binance affiliated thirdparty for wallet custody services. (Farer Decl. ¶ 23.)
In response, BAM reversed course again. In an August 4 email, BAM agreed to provide
“any documents BAM has that are relevant to the Ceffu role in creating the new wallets for
Customer Crypto Assets (as required by Section II.2. of the Consent Order) and we will explain
what we understand the process to entail.” (Ex. 14, Aug. 4, 2023 email from J. Adler at 4:17
PM.) However, the additional information eventually provided only further heightened the
SEC’s concerns about Binance Entities’ control over its Customer Assets. During a meet and
confer that same day, BAM’s counsel explained that Binance markets its wallet custody software
to third parties as “Ceffu.” (Farer Decl. ¶ 27.) However, BAM’s wallet custody software had
not changed—it was the same wallet custody software licensed from Binance under the Software
License Agreement. (Id.) BAM further explained that BAM sometimes internally referred to the
wallet custody software solution as “Ceffu,” but that BAM’s wallet custody software solution
predated Binance’s commercial offering of “Ceffu” as a third-party wallet custodial solution.
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(Id.; Ex. 9.) In other words, BAM suggested that Binance was providing the wallet services—as
it had been doing all along. (Farer Decl. ¶ 27.)
During that same August 4 meet and confer, BAM also agreed to provide additional
information about the Wallet Custody Agreement, the roles, responsibilities, and functions set
forth in the agreement, and the identification of Binance and other entities and individuals who
provide the services, including a detailed chronology with back-up documentation about the
evolution of the relationship with Binance through the termination of the agreement. (Farer
Decl. ¶ 28.) BAM further agreed to explain its position that the Wallet Custody Agreement was
purportedly “not operationalized” and therefore did not describe or govern the relationship
between BAM and Binance in providing wallet custody software and related services to BAM.
(Id.; see also Ex. 15 (memorializing request).)
In light of BAM agreeing to provide this information, the SEC sent a follow-up email the
next day, requesting from BAM specific information that would be responsive to BAM’s RFPs
concerning Ceffu, Binance.com, and the third-party custodians used by Binance.US for custody
and control of BAM and Customer Assets, including relevant infrastructure, system, technology
and related security information. (See Ex. 16.)
On August 14, 2023, BAM produced documents in response to the SEC’s August 5
request. (See Ex. 9.) Although BAM’s counsel explained on August 4 that BAM was
continuing to use Binance software, BAM made a document production on August 14 production
in response to the SEC’s August 5 request that did not contain any information about Binance’s
provision of that software service to BAM, as BAM’s counsel had represented. (Id.; Farer Decl.
¶ 31.) Rather, the production included, in relevant part, a security report for a Ceffu predecessor,
Block Technologies, and a spreadsheet BAM identified as Ceffu’s answers to a questionnaire,
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called the “Custody Solution Provider Security Questionnaire,” that BAM requires its custody
solution providers to fill out. (Id.) The questionnaire appears to cover, generally speaking,
policies and procedures related to the security of keys, among other things. (Id.; Exs. 9, 17.)
Notwithstanding this production of additional information relating to Ceffu’s
involvement in BAM’s wallet custody services, BAM’s Chief Security Officer, Erik Kellogg,
testified during his recent deposition that
. (Farer Decl. ¶ 34.a.) Further, documents recently produced by BAM’s auditor raise
questions about BAM’s representations concerning its wallet custody provider. These
documents refer to
. (Ex. 18.)
. (Id.) Kellogg testified during his deposition that
. (Farer Decl. ¶¶ 34.b.)
Even setting aside the confusion over whether it is Binance or Ceffu that is providing
BAM the wallet custody software provider, and despite being responsible for the security of
BAM’s crypto assets including Customer Assets, Kellogg testified that
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. (Id. ¶ 34.c.)
Other than this everchanging and contradictory information, BAM has failed to provide
any additional information in response to the SEC’s repeated requests concerning Ceffu or
technical documentation or other evidence related to BAM’s infrastructure, systems, security
protocols, wallet custody software and the creation, custody, and control of the wallets and
private keys. BAM initially objected to the RFP’s overbreadth and otherwise claimed such
materials did not exist; however, during his deposition, Kellogg testified about
. (Farer Decl. ¶¶ 34.d, 35.) Therefore, it
is apparent that BAM has not conducted a reasonable search consistent with its discovery
obligations, including for such documents specifically referenced in the Proposed Order.
ii. Discovery concerning BAM’s communications
The RFPs seek BAM’s communications concerning Customer Assets and related topics.
(See, e.g., Ex. 2, RFP Nos. 1-6, 9, 10, 11, 14, 15, 18-28, 30-33, and 38.) From the outset, BAM
has maintained that the SEC’s requests for any “communications” is overly broad despite their
relevance to the Consent Order. (See Exs. 4, 5 at 1.) The SEC has repeatedly attempted to
negotiate an acceptable scope to its requests. For example, on August 2 the SEC proposed as a
starting point that BAM produce responsive communications from personnel the SEC noticed for
deposition. (Ex. 19.) Yet BAM never offered any counterproposal despite almost two months of
negotiations and, astonishingly, it has not produced any of the requested communications. (See
Ex. 22.) Rather, BAM’s position has been that the SEC is simply not entitled to such discovery,
asserting that “we have repeatedly stated that we believe a communications search in the context
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of expedited discovery is inappropriate and unnecessary for your purposes.” (Ex. 22 at Aug. 10,
2023 email from M. Martens at 11:00 AM.)
To the contrary, the requested communications are essential to understanding the status
of Customer Assets and to the SEC’s efforts to ensure their safety and security. To illustrate,
BAM’s external auditor recently produced for the first time several documents and
communications between the auditor and BAM personnel that provide insight into various areas
relevant to the Consent Order, including representations BAM made to the auditor concerning
Ceffu’s role in BAM’s custodying of Customer Assets. (See, e.g., Ex. 18.) For example, BAM’s
external auditor produced a June 15, 2023 letter in which it raised
(Ex. 20.) And BAM’s external auditor testified that
. (Farer Decl. ¶ 33.a.) The external auditor, not BAM, has
produced the auditor’s June 15 letter. After multiple requests, BAM just produced
as this opposition was being finalized for filing, underscoring BAM Trading’s
lack of transparency during this expedited discovery period. (Farer Decl. ¶ 41.) The SEC did
not even learn of the existence of BAM’s auditor’s concerns expressed in its June letter until it
received the auditor’s document production in July 2023, and the SEC did not learn of
. (Id.) It is
therefore clear that BAM has had highly relevant communications relating to the Consent Order
that it has failed to produce to the SEC based on its blanket burden objections.
iii. Accounting documents and other financial information
In the RFPs and related meet and confer communications, the SEC sought certain BAM
accounting documents and financial information relating to Customer Assets including, as
relevant here: (1) BAM’s general ledgers that tracks deposits, trading, transfers, and
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withdrawals; (2) certain bank account opening documents, including for new accounts within the
past few months, and documents sufficient to show authorized signatories on key financial
accounts; (3) trial balances; detailed monthly financial statements; and (4) documents concerning
the reconciliation performed between the accounting ledgers and the newly-created wallet
addresses that would show the movement of the customer crypto assets. (Ex. 2, RFP Nos. 6, 7,
8, 9, 16, 17, 20, 25, 32, 33 39; Ex. 15.)
To date, BAM has failed to produce information responsive to these RFPs. First, it
initially claimed that its production of documents pursuant to Part IV of the Consent Order,
including information showing balances of Customer Assets for each Customer as of a mutually
agreed date, and a general ledger as of that date was sufficient in evaluating whether BAM
maintained sufficient asset. 4 (See, e.g., Exs 4, 5; Farer Decl. ¶ 42.) In addition, BAM initially
produced only screenshots of certain bank account information (some of which were
unintelligible) and information prepared by counsel identifying account balances, owners, and
signatories to establish the account balances and authorized owners and signatories for fiat
accounts. (See, e.g., Ex. 21; Farer Decl. ¶ 42.) But that information is insufficient. (Farer Decl.
¶ 42.) During the July 7 and July 24 meet and confers and subsequent communications, the SEC
explained it needed more detailed financial information—based on documents or other
evidence—and beyond this snapshot in time to evaluate and verify the information provided
regarding its fiat and crypto asset holdings, expenses, and accounting and bank statement
information and ensure that Binance.US maintains sufficient assets, including such documents
and information identified herein. (Id.) While BAM has since provided certain bank account
4
The SEC is continuing to meet and confer with all Defendants concerning their respective
productions pursuant to Section IV of the Consent Order. The SEC reserves the right to seek
further relief from the Court if the parties are unable to resolve these issues.
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information and represented it would produce at least some of the other categories of outstanding
materials, these requests remain outstanding. (See, e.g., Ex. 22.) Accordingly, the SEC
continues to seek critical financial information from BAM to assess whether it possesses assets
to satisfy customer liabilities, and that assets are appropriately controlled by BAM personnel in
the United States, as required under the Consent Order.
iv. The SEC’s request for inspection
Pursuant to Federal Rule of Civil Procedure 34(a)(2), the RFPs sought to inspect BAM’s
technological infrastructure relating to BAM’s holding of Customer Crypto Assets. (See Ex. 2.)
BAM objected, claiming, among other things, that an inspection is “administratively infeasible.”
(Ex. 4, Resp. to RFPs. at 30-31.)
BAM has provided no detail explaining its bare assertion that an inspection to assess its
software infrastructure is “administratively infeasible.” Nevertheless, as an attempt to
compromise, during the various meet and confers, the SEC requested diagrams and other
documents describing the relevant system architecture, infrastructure, systems, software, and
protocols, stressing that absent such information, an inspection may be the only option to obtain
the information necessary to evaluate the custody and control of Customer Assets. (Farer Decl. ¶
43; see, e.g., Exs. 15, 16.) BAM has responded that no such documents exist and has insisted
that Kellogg’s deposition would satisfy the SEC’s need for discovery on this issue. (Farer Decl.
¶ 43.) During Kellogg’s recent deposition, however, he confirmed that
,
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. (See Farer Decl. ¶ 34.c.)
Thus, the SEC urgently requires discovery that, to date, BAM has failed to produce, concerning
Binance’s rights and access to these systems to further evaluate Defendants’ compliance with the
Consent Order. The requested inspection should, inter alia, everything that is identified,
documented, or diagramed in the documents about which Kellogg testified during his deposition.
(See e.g., Exs. 23-25.)
v. BAM’s Interrogatory responses
The SEC’s interrogatories ask for the following information that is encompassed by
within the Consent Order’s terms:
•
Relevant BAM personnel’s prior employment, compensation, or other relationship
with the Binance Entities (Interrog. Resp. Nos. 1-4);
•
Explanation as to BAM’s prior inconsistent representations regarding its Wallet
Custody Agreement with Binance (Interrog. Resp. No. 8);
•
Information concerning how BAM continues to receive the services set forth in the
Wallet Custody Agreement in light of its inconsistent statements about it (Interrog.
Resp. No. 9);
•
Identify all Documents and Communications Concerning internal or external audits of
the BAM Entities’ possession, custody, control, transfer or movement, security,
segregation, availability, and any encumbrances or limitations to its Customer Assets.
(Interrog. Resp. No. 10);
•
Information requested relating to the documents and information improperly withheld
as discussed above, including information about CEFFU, the wallet custody software
and related system architecture, infrastructure, and systems, and concerning the
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establishment, control, and operation of the crypto asset wallets (Interrog. Resp. Nos.
15, 17, 22, 23, 24);
•
Updated information about current banking partners (Interrog. Resp. Nos. 6, 17);
•
Identify and describe in detail any agreement, relationship, affiliation, or association
between any of the Binance Entities and any Person with any access, possession,
authority, custody, or control of any Customer Assets, fiat or crypto assets of any of
the BAM Entities, or any account or wallet holding Customer Assets or the fiat or
crypto assets of any of the BAM Entities, including, but not limited to, the extent to
which any of the Binance Entities or Zhao has the authority over or the ability to
direct or instruct such Persons (Interrog. Resp. No. 15);
•
Identify and describe in detail all systems and Persons involved in the management of
any accounts, crypto asset wallets, Customer Assets, and fiat or crypto assets of the
BAM Entities (Interrog. Resp. No. 17);
•
Dates of all individuals’ possession, custody, or control of any Private and
Administrative Keys or New Private and Administrative Keys (Interrog. Resp. No. 2);
•
Information for new wallets created under the Consent Order, including the date
created, addresses, specific crypto assets held in each wallet, and holders of the New
Private and Administrative Keys (Interrog. Resp. No. 2, 6, 7, 16, 17, 19, 22; Dkt No.
71 at II.2); and
•
Information requested concerning crypto asset wallets for company and Customer
Assets (Interrog. Resp. No. 22).
To date, BAM has not provided this information. It has represented it would provide
information in response to certain requests but has not yet done so, and, for others, it either
objects to the relevance, refers generally to its productions for the information, or represents that
it will discuss internally and provide its position. In addition, the SEC requested that BAM
supplement its interrogatory responses with information set forth in various written attorney
correspondence and compilations of information. (See, e.g., Exs. 6, 22.) BAM agreed it would
provide certifications for responses in its July 31 letter, but it has not yet done so, and completely
fails to acknowledge other information provided through counsel in its August 14 and other
correspondence and productions. (See Ex. 22.) Over the course of weeks, the SEC has met and
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conferred with BAM on numerous occasions, with multiple follow-up communications, pressing
on outstanding discovery, in a vain attempt to reach a compromise as to these issues. (Farer
Decl. ¶ 47.) But BAM has failed to respond or supplement its responses to the Interrogatories
even though none of its objections have merit. (Id.)
*
*
*
The SEC has attempted to resolve these and other discovery issues in good faith,
including by agreeing to multiple extensions of BAM’s deadlines under the Consent Order. (See,
e.g., BAM Mot. Extend Deadline Verified Written Accounting, Dkt. 94.) But BAM still refuses
to produce and provide relevant information. As of the date of this filing, BAM has only
produced a little over 220 documents. Many are unintelligible screenshots of bank account
information, documents without dates or signatures, and letters from counsel and tables that
appear to be prepared for purposes of this litigation, without any supporting evidence or
verification by an individual with knowledge confirming the accuracy of the information. 5
B.
SEC’s Notice of Depositions
In objecting to the SEC’s RFPs on July 5, BAM asserted that various requests were
“more appropriate lines of inquiry for depositions,” and urged the SEC to “tak[e] advantage of
the availability of witnesses who are best positioned to answer your questions.” (Ex. 11 at 2.)
Accordingly, pursuant to the deadlines set forth in the Consent Order, on August 2, 2023, the
SEC noticed 14 BAM personnel for depositions, including BAM’s Chief Executive Office
(“CEO”) and Chief Financial Officer (“CFO”). (Ex. 19.) Even though the SEC lacked
significant document and written discovery from BAM, the SEC crafted a list of deponents based
5
As one reference point, in contrast, BAM’s external auditor has produced over 6,500
documents that primarily concern BAM’s custody and control of its assets, and that included
several documents BAM provided to its auditor but has not produced to the SEC.
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the limited discovery the SEC had received that indicated that these deponents were: (1) BAM
personnel who hold “key shards” necessary to control the crypto asset wallets that hold the vast
majority of BAM’s company and customer assets; (2) involved in the custody of Customer
Assets; and/or (3) BAM senior officers with ultimate control of the company’s operations. (Id.)
BAM objected to the SEC’s deposition notice, unilaterally determining that it would
produce only the four witnesses that BAM deemed most appropriate without explaining why
other depositions the SEC noticed were improper. (Ex. 14 at Aug. 8, 2023 M. Martens email at
5:21 PM.) In response, the SEC agreed to narrow its initial list of deponents to six individuals
and noticed a Rule 30(b)(6) of BAM, while reserving the right to seek relief from the Court for
additional depositions. (Ex. 15 at Aug. 10 J. Murphy email at 7:43 PM.)
At no time did BAM provide specific objections to each of the noticed individuals, not
even as to BAM’s CEO and CFO during the parties’ meet and confer process. (See Exs. 14, 15.)
Instead, on August 14, BAM filed a Motion for a Protective Order (“PO Motion”), asking the
Court to quash the SEC’s request for production of relevant communications, limit the number of
depositions to the four individuals that BAM had self-selected—not to include the CEO and
CFO—and prevent the SEC from examining these witnesses on certain topics even though they
fall within the scope of expedited discovery outlined in the Consent Order. (Dkt. No. 95.)
As set forth more fully below, the SEC opposes the PO Motion and respectfully moves to
compel BAM to produce discovery, and for obtain related relief as further explained below.
LEGAL STANDARD
Under the Federal Rules of Civil Procedure (“Rules”), unless limited by court order,
“[p]arties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s
claim or defense and proportional to the needs of the case.” Fed. R. Civ. P. 26(b)(1). Relevance
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is “construed broadly to encompass any matter that bears on, or that reasonably could lead to
other matters that could bear on any party’s claim or defense.” Ronaldson v. Nat’l Assoc. of
Home Builders, No. 19-01034 CKK/DAR, 2020 WL 3259226, at *4 (D.D.C. June 3, 2020)
(internal citation and quotation marks omitted).
If a discovery request is relevant, the burden shifts to the objecting party to demonstrate
why it is not permissible; the party must state their objections and reasons with specificity, and
state whether responsive materials are being withheld based on that objection. Fed. R. Civ. P.
34(b)(2)(B), (C); Athridge v. Aetna Casualty & Surety Co., 184 F.R.D. 181, 191 (D.D.C. 1998).
Rule 37 permits a party seeking relevant discovery to move to compel discovery from any party
who fails to respond to discovery. See, e.g., Breiterman v. United States Capitol Police, 324
F.R.D. 24, 27-28 (D.D.C. 2018).
Similarly, when a party moves for a protective order from discovery, it must demonstrate
“good cause” as to why the order is appropriate. Fed. R. Civ. P. 26(c). To show good cause,
“the movant must articulate specific facts to support its request and cannot rely on speculative
conclusory statements.” Tequila Centinela, S.A. de C.V. v. Bacardi & Co. Ltd., 242 F.R.D. 1, 4
(D.D.C. 2007). Rather, the responding party must show how a discovery request is overly broad
or unduly burdensome “by submitting affidavits or offering evidence which reveals the nature of
the burden.” Id. at 10 (internal citation and quotation marks omitted). Failure to meet these
requirements constitutes a waiver of such objections. Ronaldson, 2020 WL 3259226 at *5. “In
deciding whether or not to grant a protective order, courts typically weigh the burdensomeness to
the moving party against the need for, and the relevant of, the information being sought.” Id.
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ARGUMENT
The Court should grant the SEC’s Motion and deny BAM’s PO Motion. BAM has
unreasonably and unilaterally sought to limit the Consent Order’s expedited discovery
provisions, despite its continued failures in making credible assertions about the custody of
Customer Assets. This Court should reject BAM’s attempts to deny the SEC the discovery
necessary to verify the safety and security of those assets, which are issues that lie at the heart of
the Consent Order.
I.
The Court Should Compel Defendants to Comply With The Consent Order’s
Expedited Discovery Provisions
Despite the SEC’s good faith efforts to agree to a reasonable scope of the discovery
sought during the expedited discovery process, BAM has continued to take unreasonable
positions that are contrary to the Consent Order’s grant of expedited discovery to the SEC. This
Court should grant the SEC’s motion to compel as to several areas of discovery.
First, this Court should order BAM to conduct a reasonable search for documents
regarding Ceffu, the wallet software services BAM uses, and all other Binance affiliates involved
in providing such services. In particular, BAM has been unable to credibly explain its own
relationship with Ceffu, including the extent to which it is owned and controlled by Binance or
Zhao. And whether the entity involved is Binance, Ceffu, or another Binance Entity,
Defendants’ compliance with the Consent Order is in question because the limited information it
has produced to date reveals that BAM remains reliant on Binance for the custody of Customer
Assets. Indeed, Kellogg repeatedly equated Binance’s role with that of the non-affiliated thirdparty custodians expressly authorized in the Consent Order – despite the Consent Order’s
requirement (Section I) that BAM have “complete control” over Customer Assets and can only
rely upon non-affiliated third-party custodians located in the United States for wallet custody and
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related services. (See Farer Decl. ¶ 34.e.) Thus, BAM should conduct a reasonable search for
responsive documents and communications concerning any Binance Entity, including but not
limited to Ceffu, providing wallet custody software and related services and further discovery
regarding the technical architecture, infrastructure, systems, software, controls, and access as set
forth in the Proposed Order.
Second, this Court should order BAM to produce communications (including with its
auditor) regarding the custody, control, and availability of Customer Assets. The SEC has
repeatedly offered to confer on a reasonably limited search, most recently offering to limit its
request to the noticed deponents concerning the topics responsive to the SEC’s Requests relevant
topics over a period of months. (See Exs. 14, 15.) Yet BAM has persisted in claiming that any
such discovery is unwarranted, stating that “we have repeatedly stated that we believe a
communications search in the context of expedited discovery is inappropriate and unnecessary
for your purposes.” (Ex. 22.)
BAM’s position is untenable in any case, let alone here where BAM’s limited disclosures
have resulted in conflicting accounts of key events, as explained herein and in the TRO Motion.
(TRO Mot. at 32-33). 6 And Kellogg testified about
. (Farer Decl. ¶ 34.f.) Similarly, BAM’s external
auditor has recently produced and testified to
6
It is also inconsistent with this Court’s Order in which it observed it had “already authorized
the SEC to engage in the extensive early discovery” pursuant to the Consent Order. (Dkt. No.
88.)
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. (Farer Decl. ¶ 31.) These developments alone require BAM to
explain its failure to search for such communications and remedy its failures. Moore v.
Napolitano, 723 F. Supp. 2d 167, 173 (D.D.C. 2010) (“Once a plaintiff uncovers such evidence
that the defendant failed to search in particular locations or that individual searches conducted by
the defendant’s agents were inconsistent, it necessarily falls to the defendant, the party with
superior knowledge of its own records, to show the reasonableness of its decisions regarding
where and how to search for responsive documents.”).
BAM’s arguments to the contrary are unpersuasive. BAM makes only vague (and
implausible) burden assertions while failing to convey the context of the parties’ discussions
described above or provide further specificity about the nature of any burden as required.
Indeed, other than the August 18 letter produced right before this filing, BAM has not even
produced
, a request that cannot plausibly be characterized as burdensome. BAM’s general
complaint that “complying with the SEC’s requests would likely take months or longer and come
with significant and unwarranted expense,” (BAM Mot. 14), is insufficient and constitutes a
waiver of such objection. Tequila Centinela, S.A. de C.V., 242 F.R.D. 1, at 8 (“the Court only
entertains an unduly burdensome objection when the responding party demonstrates how the
document is ‘overly broad, burdensome, or oppressive, by submitting affidavits or offering
evidence which reveals the nature of the burden”) (internal citation and quotation marks
omitted). Accordingly, this Court should order BAM to conduct a reasonable search for
communications responsive to its RFPs as further detailed in the attached proposed order.
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Third, the Court should order BAM to produce accounting documents and other financial
information it has so far refused to produce. BAM has either declined or so far has yet to
produce general ledgers as of end of second quarter 2023, bank account opening documents, and
documents sufficient to show authorized signatories on the accounts, but they are crucial to
testing BAM’s assertions that Customer Assets and BAM’s assets are safe, secure, appropriately
segregated, and ready for immediate customer withdrawal. BAM has provided nothing but
vague and general objections as to why its productions to date, which are wholly insufficient, are
appropriate substitutes for this discovery. For example, BAM produced bank account
information in snapshot form, without providing additional documents that reflect the activity in
the account over time, which could enable the SEC to further test the sources and uses of BAM’s
funds. 7 Further, production of the signatory information would provide critical information
concerning who controlled these accounts.
Fourth, the Court should order BAM to make its systems and personnel available for
inspection so that the SEC may conduct an inspection of BAM’s crypto wallet architecture and
systems, or at a minimum, as an initial matter, produce diagrams and infrastructure, systems,
software, protocols, controls, and access information, including those set forth specifically in the
Proposed Order and requested during Kellogg’s deposition. Whether to permit an inspection is
within the court’s discretion, and “the court must balance the respective interests by weighing the
7
BAM has also continued to refuse to produce discovery pursuant to the SEC’s data delivery
standards. (Ex 22.) This refusal violates Federal Rule of Civil Procedure 34(b)(2)(E) and further
demonstrates BAM’s unreasonableness. The documents BAM has produced do not comply with
data delivery standards because do not contain relevant accompanying information that would be
included in a proper production of electronic documents, such as cover communications or
attachments or metadata identifying the source, custodian, file name, date, author, and revision
history. Accordingly, BAM should be ordered to produce (or reproduce) documents consistent
with SEC data delivery standards.
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degree to which the proposed inspection will aid in the search for truth” against the “burdens and
dangers created by the inspection.” Welzel, 233 F.R.D. at 186 (internal citation and quotation
marks omitted). Inspections have been permitted in cases where the location to be inspected
relates to the subject matter of the action, but also where information is sought for background or
corroboration of witness testimony. Id. (and citing cases). Given the questions and
inconsistencies raised by BAM’s own representations and the testimony of its personnel about
the Binance Entities’ access to and control of those systems, an inspection is appropriate to
permit the SEC to observe the system operating in real time and understand its permissions and
controls. BAM has not made any credible argument that such an inspection would impose an
unreasonable burden. Further, as discussed herein, when the SEC sought to find alternative
discovery methods to get discovery on this issue, such as obtaining diagrams or other documents
reflecting how this infrastructure operates, BAM claimed it did not possess such documents, only
to have those assertions contradicted by documents produced by its external auditor or in
Kellogg’s testimony. 8 Absent at least a complete production of diagrams or other documents
and information describing how the infrastructure, systems, software, and protocols governing
BAM’s company and Customer Assets and the wallet custody software and services provided by
a Binance Entity, the requested inspection is warranted.
Fifth, this Court should order BAM to supplement its responses to its Interrogatories to
provide the information identified in Section II.A.v, above. These topics are appropriate and
tailored to the issues ripe for discovery under the Consent Order. Under Rule 33, a “party to
8
BAM also contradicts itself in claiming that further discovery is unnecessary due to the
“enormous amount of documents and information concerning BAM’s asset custody practices”
that BAM produced in the SEC’s investigation that preceded the Complaint. (BAM PO Mot. at
8; see also id. at 18). Those documents almost exclusively concern BAM’s historical practices –
which BAM now takes the erroneous position are fully outside the Consent Order’s scope.
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whom an interrogatory is propounded must provide true, explicit, responsive, complete, and
candid answers.” English v. Wash. Metropolitan Area Transit Auth., 323 F.R.D. 1, 8 (2017)
(citation and internal quotation marks omitted). Where a party provides business records instead
of preparing a narrative written response to an interrogatory, the response must specify the
records in sufficient detail to enable the interrogating party to locate them and identify them “as
readily as the responding party could,” and such records must provide a complete response if
further narrative response is provided. Id. at 18 (internal citation and quotation marks omitted).
BAM’s responses have fallen short of these basic requirements, failing to provide relevant
responses on issues concerning critical issues such as its wallet custody practices, and BAM
personnel’s prior affiliations with Binance Entities. Nor has BAM and it has offered no
reasonable basis for refusing to provide fulsome, verified responses on these relevant issues.
Accordingly, the SEC’s Motion to Compel should be granted in its entirety.
II.
The Court Should Deny BAM’s PO Motion and Allow the SEC to Depose BAM’s
CEO, CFO, and the Additional Witnesses the SEC Identified for Deposition
BAM moves for a protective order to limit the SEC’s ability to take depositions beyond
the four BAM witnesses that BAM offered, and to prohibit the SEC from deposing BAM’s
current CEO, Brian Shroder, and CFO, Jasmine Lee. The Court should deny BAM’s PO Motion.
A.
The SEC Should Be Permitted to Depose BAM’s CEO and CFO
The SEC alleges that Binance and Zhao created BAM to operate the Binance.US
Platform as part of their broader scheme to evade U.S. regulatory oversight while profiting off of
U.S. capital markets. (Compl. ¶¶ 143-208.) As part of that plan, Binance and Zhao controlled
BAM, including the custody of Customer Assets. (Id.) BAM’s first two CEOs failed in their
attempts to get more independence from Binance and Zhao. In fact, in August 2021, BAM’s
second CEO (named as “BAM CEO B” in the Complaint) decided to quit because Zhao “was the
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regarding an entirely different test applied to depositions of senior government officials, willfully
ignoring that the “apex doctrine” referred to in those cases requires a showing of “extraordinary
circumstances” based on policy concerns inapplicable here. See United States v. Newman, 531
F. Supp. 3d 181, 188 (D.D.C. 2021) (discussing the concerns underlying the “apex doctrine”
applied to senior government officials, including the need to protect the “integrity and
independence of the government’s decision-making processes.”). BAM’s cited cases show that
to the extent an “extraordinary circumstances” standard applies in this context, it is a showing
BAM must make in arguing why the depositions should not be permitted. Celerity, Inc. v. Ultra
Clean Holding, Inc., No. C 05-4374, 2007 WL 205067, at *5 (N.D. Cal. Jan. 25, 2007) (“[i]t is
very unusual for a court to prohibit the taking of a deposition altogether and absent extraordinary
circumstances, such an order would likely be in error.”) (quotation omitted).
Accordingly, BAM fails to demonstrate good cause to grant a protective order concerning
the SEC’s noticed depositions of Shroder and Lee.
B.
The Court Should Deny BAM’s Motion for Protective Order as to the
Number of Depositions and Allow the SEC to Depose Identified Witnesses
BAM further seeks a protective order “limiting the SEC to four depositions of BAM
employees.” PO Mot. at 2. The Court should reject BAM’s position and allow the SEC to take
the depositions necessary to address the relevant issues under the Consent Order.
Specifically, the SEC asks that the Court to deny BAM’s PO Motion and compel BAM to
produce for deposition the witnesses identified in Exhibit 31, that contains a description of the
relevance of each witness. 11 Each of these witnesses is critical to the issues that are at the core of
expedited discovery, including BAM’s compliance with the Consent Order. For example,
11
The SEC filed Exhibit 31 under seal given the security issues associated with the identification
of shard holders.
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BAM’s current and former wallet key shard holders are of critical importance to the custody and
control of crypto assets totaling over $2 billion, and Defendants have failed to provide any
appropriate basis for their objection to the deposition of more than one shard holder. They have
not and cannot explain how one shard holder could speak to the other shard holders’ experience,
including security of the device that holds the shard and signing to approve transactions, the
relationship with or any level of control by Defendants Binance or Zhao, and their respective
compliance with the requirements of the Consent Order. All of this information—which is
unique to each individual shard holder—is necessary to confirm that the assets truly are within
the custody and control of BAM personnel in the United States and are being handled
appropriately. Further, the SEC seeks depositions of key employees who work on BAM’s
“Clearing” and “Treasury” teams, who are involved in the custody and transfer of Customer
Assets, to test whether BAM’s processes comply with the Consent Order, including whether
Binance and Zhao have any influence or control over those operations. 12
BAM’s response is that the four witnesses it identified should suffice, and that the SEC
should not be permitted anything more given the evidence BAM claims it already produced.
(Dkt. No. 95 at 5-9.) As explained above, however, BAM’s compliance with the expedited
discovery process has been woefully inadequate, and raises substantial questions about BAM’s
custody and control of Customer Assets, including whether it is currently in violation of the
Consent Order. Thus, the SEC should be permitted to take depositions of BAM personnel that it
believes warranted. BAM cites no authority to the contrary.
12
The SEC has also issued deposition notices to Binance and Zhao but has agreed to continue to
meet and confer as to those depositions (along with other discovery requests) until the discovery
disputes between the SEC and BAM now before the Court are resolved. In addition, the SEC
reserves its right, under the Consent Order, to seek the depositions of other witnesses as it
obtains additional discovery from any of the Defendants.
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The SEC therefore respectfully requests that this Court deny BAM’s PO Motion to
permit the SEC to depose the list of witnesses identified in Exhibit 31. 13
III.
The Court Should Extend the Expedited Discovery Period
Pursuant to Rule 6(b), the court may for good cause extend the time in which an act must
be done “with or without motion or notice if the court acts, or if the request is made, before the
original time or its extension expires.” Here, there is good cause to extend the expedited
discovery period. Despite the SEC’s diligence in attempting to obtain the relevant discovery,
including engaging in weeks of discussions with BAM to resolve numerous outstanding issues,
BAM’s stonewalling and consistent delays necessitate an extension of time to complete
outstanding discovery. Notwithstanding the additional time the SEC has agreed to extend BAM
as to almost every deadline under the Consent Order, when the SEC has reiterated that these
extensions will likely necessitate an extension of the expedited discovery period, and the
inordinate amount of time the SEC has spent following up on outstanding requests, BAM has
13
Given BAM’s numerous discovery failures as described herein, the SEC has discussed
whether BAM and the other Defendants would agree to extent the 90-day time period for
expedited discovery pursuant to Paragraph V.1 of the Consent Order. BAM has informed SEC
counsel that it opposes any time extension. The SEC, Binance, and Zhao have separately agreed
to an extension of the expedited discovery period as to those two Defendants. Specifically, the
SEC, Binance, and Zhao have agreed to suspend the 45-day discovery period as to those two
Defendants (Consent Order V.1) and begin a 45-day discovery period the day after either (1) the
Court enters an order denying the SEC’s motion to compel and granting BAM’s motion for
protective order or (2) the date upon which the Court orders BAM to comply with the SEC’s
discovery requests. During that suspended time period, the SEC agrees it will not serve any
additional discovery requests on Binance or Zhao, but the parties agree to meet and confer in
good faith on Binance’s and Zhao’s objections to all discovery and deposition notices issued to
date. Further, Binance and Zhao will continue collecting documents and information during the
suspended time period, such that, on the first day the 45-day discovery period begins as set forth
above, Binance and Zhao will begin producing documents in response to the SEC’s document
requests, serve responses to the SEC’s interrogatories, and be prepared to set dates for
depositions, or, alternatively, file a motion for protective order. Further, the SEC, Binance, and
Zhao have reserved the right to move the Court on additional discovery motions concerning any
discovery disputes that become ripe after the 45-day period resumes.
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been wholly delinquent in satisfying its discovery obligations under the Consent Order and the
Federal Rules.
Thus, the SEC respectfully requests that if the Court grants the SEC’s Motion in whole or
in part, that it 1) require the production of any additional discovery be substantially completed
within 14 days of its order, and 2) extend the expedited discovery period as to BAM for a period
of 30 days beyond the date that BAM confirms it has substantially completed its document
productions consistent with the Court’s Order. 14 This extended period strikes the appropriate
balance in providing sufficient time to resolve outstanding issues while aligning as much as
possible to the scope and timing of expedited discovery under the Consent Order.
CONCLUSION
For these reasons, the Court should grant the SEC’s Motion, deny the BAM Defendants’
Motion for Protective Order, and order the other relief the SEC seeks in accordance with the
Proposed Order attached hereto.
Dated: August 28, 2023
Respectfully submitted,
/s/Jennifer L. Farer
Matthew Scarlato (D.C. Bar No. 484124)
Jennifer L. Farer (D.C. Bar No. 1013915)
J. Emmett Murphy
David A. Nasse (D.C. Bar No. 1002567)
Jorge G. Tenreiro
SECURITIES AND EXCHANGE COMMISSION
(202) 551-5072 (Farer)
farerj@sec.gov
Attorneys for Plaintiff
14
If the SEC disagrees that BAM has substantially completed its production, the SEC reserves
the right to raise the issue with the Court if the parties cannot resolve the issue themselves.
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