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The Morning Risk Report: SEC Says Binance Misused Customer Funds, Ran Illegal Crypto Exchange in U.S.

By Dylan Tokar

 

Good morning. The Securities and Exchange Commission on Monday sued Binance, the world’s largest cryptocurrency exchange, alleging the overseas company operated an illegal trading platform in the U.S. and misused customers’ funds.

The SEC lawsuit also named Changpeng Zhao, Binance’s founder and controlling shareholder, as a defendant. The SEC said that Binance and Zhao misused customers’ funds and diverted them to a trading entity that Zhao controlled. That trading firm, Sigma Chain, engaged in manipulative trading that made Binance’s volume appear larger than it actually was, the SEC said.

Binance also concealed that it commingled billions of dollars in customer assets and sent them to a third party, Merit Peak, which was owned by Zhao, the SEC alleged. The Wall Street Journal reported last year that the SEC was examining the relationship between Binance.US—the U.S. arm created in 2019—and Sigma Chain and Merit Peak.

“This will be a landmark case,” said Kurt Gottschall, a partner at Haynes and Boone and former head of the SEC’s Denver office. “The SEC appears to be very concerned about the commingling of customer funds.”

  • Related: Crypto Prices Slide After SEC Sues Binance
 
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Promising M&A Trends Could Help Recharge Private Equity Deals

While borrowing money is considerably more expensive today than a year ago, private equity groups continue to sit on a significant amount of dry powder.  Keep Reading ›

More Risk & Compliance articles from Deloitte ›
 

Compliance

Silicon Valley Bank’s failure unnerved the lending industry. PHOTO: PRESTON GANNAWAY FOR THE WALL STREET JOURNAL

Big banks could face 20% boost to capital requirements.

U.S. regulators are preparing to force large banks to shore up their financial footing, moves they say will help boost the resilience of the system after a spate of midsize bank failures this year.

The changes, which regulators are on track to propose as early as this month, could raise overall capital requirements by roughly 20% at larger banks on average, people familiar with the plans said. The precise amount will depend on a firm’s business activities, with the biggest increases expected to be reserved for U.S. megabanks with big trading businesses.

Banks that are heavily dependent on fee income—such as that from investment banking or wealth management—could also face large capital increases. Capital is the buffer banks are required to hold to absorb potential losses.

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  • Twitter failed to prevent dozens of known images of child sexual abuse from being posted on its platform in recent months, according to Stanford University researchers who said the situation indicated a lapse in basic enforcement.
     
  • Artem Uss is a Kremlin-linked businessman accused of illegally exporting American military technology to Russia. Last October he was arrested in Italy at the U.S.’s request. Then he vanished.
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"This case arises from Defendants’ blatant disregard of the federal securities laws and the investor and market protections these laws provide. In so doing, Defendants have enriched themselves by billions of U.S. dollars while placing investors’ assets at significant risk."

— The U.S. Securities and Exchange Commission, in a complaint filed against Binance, the world's largest cryptocurrency exchange
 

Risk

A 3M spokesman said the two sides are making significant progress toward a resolution. PHOTO: NICHOLAS PFOSI/REUTERS

Trial in litigation over ‘forever chemicals’ delayed for settlement talks. 

A federal judge delayed a landmark trial set to begin Monday between 3M and a Florida city to help the sides try to reach a global settlement that could determine how much 3M and other companies pay to filter PFAS chemicals from drinking water nationwide.

Stuart, Fla., a city of 18,000 north of Palm Beach, had sued 3M for $115 million to recover the cost of building a treatment system and operating it for the next 40 years. The city alleges that the company knew that PFAS chemicals in firefighting foam the city used were toxic and would eventually taint water supplies.

Read more: Coastal Town Brings Mass Litigation—and an ‘Existential Threat’—to Chemical Giants

 
  • Persistent strength in the economy has wrong-footed bets that the Federal Reserve will make large interest-rate cuts this year, potentially undermining a key element of support for the 2023 stock rally.
     
  • A major dam and power station in a Russian-occupied part of Ukraine were destroyed Tuesday, with both sides accusing each other of being responsible for an incident that has put thousands of homes at risk and potentially threatened the safety of Europe’s largest nuclear power plant.
     
  • Saudi Arabia over the weekend slashed 10% of the kingdom’s oil output to boost prices, and the returns so far suggest it could be a costly bet.
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4.5%

The unemployment rate in California in April. The state has the nation's second-highest rate, with Washington and Oregon close behind.

 

Data Security

ILLUSTRATION: JON KRAUSE

Why companies shouldn’t try to catch employees with fake phishing emails. 

We’ve all seen it: that unexpected email with an attachment or link to something important. Except the email isn’t actually from who it says it is; instead, it is the IT department sending a fake phishing message to see if you will click on it.

But recent research suggests these phishing simulations can do more harm than good—angering employees without significantly improving an organization’s defenses.

How hackers can up their game by using ChatGPT.

Consumers, beware: AI chatbots like ChatGPT are likely to drive an increase in the use and effectiveness of online fraud tools such as phishing and spear-phishing messages.

In fact, it could already be happening. Phishing attacks around the world grew almost 50% in 2022 from a year earlier, according to Zscaler, a cloud-security provider. And, some experts say, artificial-intelligence software that makes phishing messages sound more believable are part of the problem. 

 

What Else Matters

  • Federal officials have arrived in Virginia to inspect the wreckage of the crashed private plane that flew over the nation’s capital and was temporarily intercepted by fighter jets.
     
  • Lawyers for Donald Trump met with Justice Department officials on Monday, according to people familiar with the matter, to argue against any indictment of the former president over his handling of classified documents at his Mar-a-Lago resort.
     
  • Apple unveiled the Vision Pro headset, the company’s first major new product in a decade, a device capable of allowing users to experience virtual reality and digital apps overlaid on the real world.
     
  • Unionized dockworkers throttled cargo operations at several West Coast ports on Monday, extending job actions that have snarled imports and prompting retailers to ask the Biden administration to intercede.
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About Us

Follow us on Twitter at @WSJRisk. Follow Risk & Compliance editor David Smagalla @DSmagalla_DJ and reporters Mengqi Sun @_MengqiSun, Dylan Tokar @dgtokar and Richard Vanderford @VanderfordRich.

You can reach us by replying to any newsletter, or email David at david.smagalla@wsj.com.

 
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