Binance Blames SEC In Suit Response: “Manipulative Trading Was Entirely Appropriate”

Binance.US has petitioned the court to reject the Securities and Exchange Commission’s (SEC) proposed temporary restraining order on its assets, contending that such action would effectively bring its operations to a halt.

In a filing submitted on June 12, Binance.US strongly criticized the SEC’s emergency motion for a temporary restraining order, denouncing it as overly harsh and draconian.

A hearing to address the requested restraining order is scheduled for June 13 at the U.S. District Court for the District of Columbia.

Binance.US argued that complying with the restraining order would compel the closure of BAM Trading Services Inc., the entity responsible for providing crypto trading and exchange services for Binance.US.

“Implementing this relief would primarily harm BAM’s customers, essentially shutter BAM’s operations, and prevent BAM from defending itself in this legal battle,” the company said.

Significantly, Binance.US also took issue with the SEC’s overall approach to pursuing legal action against the exchange, asserting that “all of the SEC’s claims lack merit” since the regulator has yet to “identify a single security traded on BAM’s platform.”

“The SEC provided no compelling basis and identified no precedential support for the extreme and punitive relief it seeks,” the complaint added.

As of the current moment, the SEC has alleged that at least 68 cryptocurrencies qualify as securities.

“The SEC presupposes that cryptocurrency is inherently a security, but this assumption is unfounded. The fact that numerous cryptocurrency exchanges, including BAM, have operated in the United States for years without any interference from the SEC contradicts their claim that they are unambiguously subject to securities regulations,” the company further argued.

Moreover, Binance.US emphasized that it has made significant efforts to cooperate with an ongoing SEC investigation that commenced on December 20, 2020. The filing stated that the investigation has resulted in over 700,000 individual communications and substantial data related to its day-to-day operations.

“The alleged manipulative trading… was entirely appropriate”

In one of its manifestations, BAM argued that “the SEC has failed to present evidence supporting its insinuation that Sigma Chain was engaged in wash trading,” adding that the evidence is comprised of conclusory statements of an SEC attorney without any accompanying documentary evidence or data.

This is in response to SEC’s complaint alleging that Binance CEO Changpeng Zhao and Binance maintained control of customer assets, enabling them to mix or divert customer assets, including to Sigma Chain, an entity owned and controlled by Zhao.

Wash trading refers to a fraudulent practice wherein a trader conducts buying and selling transactions of the same asset within their own accounts, without any genuine economic purpose. This type of trading activity is not driven by market forces such as supply and demand, and it lacks the characteristics of arm’s length market transactions. The primary aim of wash trading is to create an illusion of increased trading volume, liquidity, and trading interest for the specific asset involved.

But even if it were, BAM argues that “the trading activity at issue was legitimate.”

“By way of background, Sigma Chain operates several independent trading strategies that perform different functions within BAM Trading’s various products,” the firm said. “The purpose of these trading strategies is to facilitate Sigma Chain’s role as a market maker for BAM’s customers. While these strategies may interact in the market, the SEC has repeatedly recognized that this type of inadvertent self-trading between independent strategies is entirely bona fide and not improper.”

And if it were wash trading, the crypto firm said “the SEC has not established that it was material” to the issue.

“The Colby Declaration asserts that wash trading occurred on one day in 2019, from June through August 2021, and a handful of days in 2022. The trading volume at issue over these time periods was a miniscule portion of BAM’s aggregate trading volume,” the company added.

“Why did the SEC let these platforms grow to their current size if it was always illegal?”

In a joint rebuttal by Binance and Zhao, they blamed the SEC for categorizing the asset freeze order as an “emergency”.

“The SEC alleges that Binance.US has been operating unlawfully since it launched in 2019. It alleges that has been operating unlawfully since its launch in 2017, including the early years when the SEC says it openly had U.S. users. BNB launched in 2017 and traded on both platforms since their respective launches.”

“Why did the SEC let these platforms grow to their current size if it was always illegal?” the firm asked.

The firm further argued that the ongoing investigation involving Binance and Zhao has lasted for several years and the SEC had never indicated any potential risk to BAM’s customer assets, the company alleged. However, the SEC’s complaint and its motion for a temporary restraining order fail to address the essential question of why the SEC is taking action now.

“Neither the SEC’s complaint nor its brief in support of its motion for a temporary restraining order provide any answer to the fundamental question: why now?” the firm added.

On June 5, the SEC initiated legal action against Binance and its affiliates, accusing the crypto exchange of failing to register as a securities exchange and enabling U.S. customers to trade cryptocurrencies categorized as securities.

Additionally, the regulator alleged that Zhao had access to Binance.US customer funds and purportedly transferred $12 billion of Binance’s funds through a privately-controlled entity called Merit Peak.

The following day, on June 6, the SEC filed an emergency motion for a temporary restraining order against Binance, seeking to freeze assets held on Binance.US until the exchange could prove that CZ or any other Binance executive could not move the funds.

While both Binance and Binance.US have consistently refuted the SEC’s allegations on social media throughout the past week, a joint memorandum submitted alongside the filing marked their first official response to the accusations.

The memorandum argued that the SEC has failed to “identify a single instance in which BAM customer assets were mishandled or misused.”

“Indeed, there is no actual ’emergency’ here, apart from the one manufactured by the SEC for its own purposes,” added the memorandum.

But it seems while Binance and the defendants are claiming the SEC’s complaints are arguably based on lack of merit, they seem to be preparing for a legal battle.

George Canellos, a partner at Milbank’s New York office, has declared himself as counsel for both BAM Trading and Management in the recent filing. Canellos previously served as co-director of the enforcement division at the SEC from 2009 to 2014. During his tenure, he played a role in investigations that resulted in $570 million in sanctions against JPMorgan Securities, Credit Suisse Securities, RBS Securities, and Bank of America for misleading investors about residential mortgage-backed securities after the 2008 financial crisis.

In the midst of the legal brouhaha, Binance has recently made subtle changes to its Terms of Service, leaving users potentially affected by the modifications unaware. The revisions primarily revolve around the handling of digital assets that are no longer listed on the platform.

Under the updated terms, Binance now possesses exclusive authority to determine the digital assets available on its platform, granting them the right to add or remove assets at their discretion.

Information for this briefing was found via Coin Telegraph, Blockworks, and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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