On April 17, 2023, the SEC announced that it “charged crypto asset trading platform Bittrex, Inc. and its co-founder and former CEO William Shihara for operating an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Bittrex, Inc.’s foreign affiliate, Bittrex Global GmbH, for failing to register as a national securities exchange in connection with its operation of a single shared order book along with Bittrex.” SEC Press Release
“Today’s action, yet again, makes plain that the crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity," said SEC Chair Gary Gensler. "As alleged in our complaint, Bittrex and issuers that it worked with knew the rules that applied to them but went to great lengths to evade them by directing issuer-applicants to ‘scrub‘ offering materials of information indicating that certain crypto assets were securities. Further, Bittrex, as alleged, failed to register and comply with U.S. securities laws as an exchange, broker-dealer, and clearing agency. Cosmetic alterations did nothing to change the underlying economic realities of the offerings and Bittrex’s conduct. Today we’re holding Bittrex accountable for its non-compliance." Crypto Criminal Defense Lawyer Blog
"We allege that Bittrex repeatedly chose profits over investor protection," said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. "As laid out in our complaint, Bittrex’s business model was based on three things: circumventing the registration requirements of the federal securities laws; counseling issuers of crypto asset securities to do the same by altering their offering materials; and combining multiple market intermediary functions under one roof to maximize profits. Today’s action not only holds Bittrex accountable for misconduct that we allege put investors at risk, but should also send a message to other non-compliant crypto market intermediaries to follow the federal securities laws or be held accountable for their violations." SEC Press Release
Prior to filing the lawsuit, it was reported that the SEC sent Bittrex a Wells Notice Letter. In response to the Wells Notice, Bittrex announced that to to regulatory uncertainty, it planned to exit from United States marketplace by the end of April 2023. But prior to exiting the United States, the SEC dropped a complaint on Bittrex charging it operates an unregistered securities trading platform.
According to the complaint, the SEC alleges that Bittrex has been operating an unregistered trading platform, violating the Securities Exchange Act of 1934 (the "Exchange Act"). SEC Complaint The complaint notes that since 2014, Bittrex has operated the Bittrex Platform, a trading platform through which U.S. customers can buy, sell, and trade crypto assets, including crypto asset securities. According to the SEC, Bittrex has merged three functions typically separated in traditional securities markets – those of broker-dealers, exchanges, and clearing agencies – without registering with the SEC or obtaining any applicable exemptions from registration.
The alleges that Bittrex has been operating as an unregistered broker, exchange, and clearing agency since the launch of the Bittrex Platform. Specifically, the SEC claims that Bittrex:
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Acted as an unregistered broker by soliciting potential investors, handling customer funds and assets, and charging fees for these services.
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Acted as an unregistered clearing agency by holding customers' assets in Bittrex-controlled wallets and settling customers' transactions by debiting and crediting relevant accounts.
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Operated the Bittrex Platform as an unregistered exchange, along with Bittrex Global, by providing a marketplace that brings together orders of multiple buyers and sellers of crypto assets and matches and executes those orders.
The SEC further alleges that Bittrex knowingly allowed securities to be traded on its platform while directing issuers of crypto assets to "scrub" their public statements of any language that could raise questions from the SEC regarding the nature of these assets. This "problematic statement cleanup" campaign was designed to conceal the true nature of the offerings from the public and regulators.
This campaign included Bittrex directing certain issuers of crypto asset securities that Bittrex wanted to make available on the Bittrex Platform to first purge public statements of “investment-related terms” that Bittrex understood could make a crypto asset subject to regulation as a crypto asset security under the Supreme Court’s decision in SEC v. W.J. Howey Co., 328 U.S. 293 (1946) and well-established principles of the U.S. federal securities laws. In other words, Bittrex knew what statements to ask issuers to “scrub” because it understood the test to determine whether a crypto asset was being offered and sold as a security. SEC Complaint
The SEC claims that Bill Shihara, former CEO of Bittrex, directed the company's operations and activities, including decisions regarding which crypto assets to make available for trading on the Bittrex Platform and the "problematic statement cleanup" campaign. Shihara was allegedly motivated by financial interests, as his compensation totaled at least $130 million.
The SEC alleges that Bittrex, Bittrex Global, and Shihara violated various registration provisions of the Exchange Act, including: (1) Operating as an unregistered exchange in violation of Exchange Act Sections 5 [15 U.S.C. § 78e; (2) Acting as a broker without registration, in violation of Exchange Act Sections 15(a) [15 U.S.C. § 78o(a)]; and (3) Acting as a clearing agency without registration, in violation of Exchange Act Sections 17A(b) [15 U.S.C. § 78q-1(b)]. Additionally, the SEC claims that Shihara violated these provisions as a control person over Bittrex under Exchange Act Section 20(a) [15 U.S.C. § 78t(a)].
Unless Defendants are permanently restrained and enjoined, there is a reasonable likelihood that they will continue to engage in the acts, practices, and courses of business set forth in this Complaint and in acts, practices, and courses of business of similar type and object in violation of the federal securities laws. SEC Complaint
This blog post was prepared with the assistance of ChatGPT-4 AI. Nothing in this post should be considered legal advice or the creation of an attorney-client relationship. This blog is strictly for informational purposes only.