Let nobody say that crypto billionaire and San Francisco political mega-giver Chris Larsen is not a complicated man. Or a busy one.
Larsen, the co-founder and executive chairman of the crypto firm Ripple, is a generous benefactor of the police, police-adjacent nonprofits, Mayor London Breed and, in the just-concluded election cycle, Breed’s tough-on-crime ballot measures. Those would be Prop. E, which permits cops to chase property criminals, reduces use-of-force reporting and enables more surveillance without oversight, and Prop. F, which subjects welfare recipients to drug screenings and compels drug users into treatment.
He was — and still is — a backer of ousted District Attorney Chesa Boudin — who was a partner in Larsen’s quest to install thousands of surveillance cameras in San Francisco. Larsen has since become a major donor to Boudin’s scourge-turned-successor, Brooke Jenkins.
Larsen explained his support for Prop. E to Mission Local as a necessary corrective to what he saw as excesses in the wake of the police murder of George Floyd — and an off-ramp for frustrated voters who, otherwise, would “vote for dumb things like three strikes.”
So, on the local level, Larsen is Donor No. 1 for law-enforcement and law-enforcement-aligned politicians. And, now, federal law-enforcement is coming around, seeking not millions, but billions.
But this is not a friendly situation.
Last year, a New York judge ruled that Larsen’s company, Ripple, had been operating in violation of securities law for more than a decade by selling its digital asset XRP to institutional investors without registering with the Securities and Exchange Commission. On March 25, in a scathing memo describing Ripple as a serial scofflaw, the Securities and Exchange Commission called for the gaudy sum of $2 billion in civil penalties.
So, that’s … ironic, yes? The guy funding law enforcement, the mayor, and the mayor’s law-enforcement push founded and ran a business deemed by federal law enforcement to have been breaking the law for years.
Larsen, however, doesn’t see it that way. When asked if he has a law-enforcement problem, he replied, “The SEC is not law enforcement. It’s financial regulation.” He described the federal government’s request for $2 billion in damages as a “press release” and “unhinged government overreach meant to get the message to the industry.” Ripple’s rejoinder to the feds’ big-dollar demand is pending.
The notion that the SEC is not law enforcement, however, struck legal experts as something of a Jedi mind trick. For starters, if you visit the SEC’s website, you will find it spelled out, verbatim: “We Enforce Federal Securities Laws.”
“The SEC is absolutely law enforcement,” says Benjamin Edwards, a professor at the WIlliam S. Boyd School of Law at the University of Nevada, Las Vegas, where he specializes in business and securities. “To say it’s not law enforcement is ridiculous.”
No, the SEC can’t lock you up; you’d have to get the Department of Justice involved for that. That was what happened to crypto-fraudster Sam Bankman-Fried, who was sentenced to 25 years in federal prison on March 28. But, as Edwards points out, securities cases are predominantly about money. SEC civil enforcement actions allow it to recover money — and, if it gets its way in the Ripple case, lots and lots of money.
Legal experts also differed with Larsen that the SEC’s mega-ask is a crass publicity stunt.
“This isn’t just for headlines,” says Ilya Beylin, a law professor at Seton Hall University. Like the university’s fictitious Newark neighbor, Tony Soprano, the feds are very serious about their money, and will go to great lengths to retrieve it.
“I suspect they will settle,” Beylin continues. “And I suspect the settlement will be very significant.”
Depending upon the outcome of the feds’ case vs. Ripple and others, San Francisco’s donor class may — or may not — have to find other ways to make and spend money.
It’s a complicated case, and this is a complicated law. And a surreal one: You start with a dispute over a citrus grove and, 78 years later, you’ve got the multi-pronged test to decide whether cryptocurrency falls under the jurisdiction of the Securities and Exchange Commission.
According to a growing number of judges, it does. And this is suboptimal news for an industry that takes to regulation like slugs do to salt.
“The fight, for them, is existential,” says Mark Hays, a senior policy analyst at Americans for Financial Reform. Crypto firms are spending hundreds of millions of dollars in legal fees to fight SEC lawsuits and are pouring big dollars into lobbying efforts to exclude crypto from the traditional financial regulatory structure. The super-PAC Fairshake, backed by massive donations from Ripple and other Crypto firms, put at least $6 million into derailing Katie Porter’s California senate run.
“They are saying the rules should be rewritten because they can’t operate under the rules,” Hays continues. “This means their business model is not compatible with the law.”
The law here traces back to the wake of the Great Depression, when so many people lost everything in a nigh-unregulated market. To prevent this, “securities” now come under the aegis of the Securities and Exchange Commission. A “security” is a tradable financial asset: That could be stocks, bonds or mutual funds. It could also be chinchillas or an investment share in a Florida orange grove. Or, as of January, spot bitcoin exchange-traded product (ETP) shares.
If you’ve bought any stocks or have a Vanguard account, you know all about the voluminous mandatory disclosures provided to investors in this highly regulated field. Without these, investors cannot make informed investment decisions. Business models, insofar as there is one, must be divulged.
In the past decade, the SEC has taken hundreds of enforcement actions against crypto firms. The case vs. Ripple, however, was a setback. The SEC partially won — it is asking for $2 billion after all. But it also partially lost, leading to much ebullient car door-slamming in the crypto community. Lee Reiners, a lecturing fellow at the Duke University Financial Economics Center and Duke Law, notes that this was the first loss — or even partial loss — for the SEC in its dealings with crypto.
The SEC dropped charges against Larsen and Ripple CEO Brad Garlinghouse last year. The executives have presented this as an indicator of government overreach. Legal experts told Mission Local that this was a move of expediency by the government, which wished to hasten its appeal in the case.
Perhaps both of these things can be true.
There is an awful lot riding on a potential appeal of U.S. District Court Judge Analisa Torres’ split ruling in the Ripple case. Larsen exuded confidence: “We won everything important.”
Legal experts, however, again see things differently. They predict the feds have good odds of prevailing on appeal, in large part because Torres’ ruling struck them as “bonkers,” in Beylin’s words.
In July, Torres found that Ripple had been improperly selling hundreds of millions of dollars’ worth of unregistered securities via its XRP token for years. But she drew a distinction. When transacting directly with savvy, institutional investors, yes, she ruled, this was an illegal sale of unregistered securities. But she found this was not the case when XRP tokens were sold to regular folks, indirectly, through secondary parties.
“The judge’s legal reasoning is hugely problematic,” says Todd Phillips, a law professor at Georgia State University. “When Ripple sold securities to sophisticated investors, securities laws protected those investors. But when they sold them to you and me, it no longer applied. People who needed protection the most didn’t get it.”
Torres made her ruling in July. But, in December, U.S. District Court Judge Jed Rakoff saw things differently, and essentially found in an SEC case vs. crypto outfit Terraform that crypto tokens are inherently a security. And, just last month, U.S. District Court Judge Katherine Polk Failla essentially found the same in an SEC action vs. crypto outfit Coinbase.
All three of these cases were in the Southern District of New York. Larsen downplays Rakoff and Failla’s rulings, noting that they were just summary judgments. That’s true — but subject-matter experts felt this was a big deal nonetheless. “This isn’t a case of witnesses differing, or there being credibility judgments for the judge to make,” says Beylin. We should not expect any Perry Mason moments in court: “Even though this is at the summary judgment stage, there are not a lot of genuinely contestable facts.”
Duke University’s Reiners sums it up: “It’s not looking so good on appeal for Ripple now,” he says. “They’ve had two different judges in the same court reject Judge Torres’ logic.”
If you’re a crypto billionaire putting big money into San Francisco politics, that’s not the greatest of news. But it’s not the coup de grâce. Not yet, at least.
Crypto, Reiners continued, “is as much of an ideology as it is an asset class. Ideologies can last for a very long time. It’s real in the sense that it’s not going away.”
He’s just playing the old game. There is a legal system for you and me, and the community generally, then there is a legal system for billionaires. “White collar crime” most often a form of fraud, is rarely enforced and almost never reported. Shoplifting a candy bar from Walgreens on the other hand excites moral panic from all kinds of media and the death penalty is not considered cruel and certainly not unusual. Larsen wants the cops to enforce rules for the petty folk, while he will hire battalions of lawyers to fight for his billions in court, at the SEC, the White House etc.
So, that’s … ironic, yes? The guy funding law enforcement, the mayor, and the mayor’s law-enforcement push founded and ran a business deemed by federal law enforcement to have been breaking the law for years.
Sounds a lot like a former president to me. So yes, ironic, but, typical of 21st Century success stories and why people are breaking the law in record numbers.
if crypto currency is not an investment vehicle to be regulated by the SEC, is it just another currency which is not legal tender in the united states? Appreciate the description of the opinion of the judge who feels unregulated and undisclosed information to professional investors was “illegal sale of unregistered securities” but to regular people it was fine. Perhaps this is similar to the police policies violating people’s rights being ok as long as they’re not aware of those rights but it becomes illegal when attempting the same to lawyers and other law enforcement professionals who will sue.
Currencies are convertible instruments backed by a central bank. The legitimacy of the currency is dependent upon the credibility of the nation state and its central bank.
Securities are instruments that represent some fraction of value upon which regulators impose transparency and trading regulations to protect investors.
No central bank, no currency. A blockchain is not a central bank.
I await the Federal Court ruling that refers to them as “crypto swindlers.”
When Chris Larsen punches me out on the street I hope the cameras he is funding capture the moment.
one should consider the current retail theft surge as an attempt by the poor to obtain some of the billions of dollars in wealth that many businesses absconded without consequence during the pandemic.
the paycheck protection program allowed businesses to collect money for profit and then declare bankruptcy or simply close their restaurants after the faucet was turned off.
b of a failed to secure the money from edd and so billions were lost in fraud with no consequences for the corporation .
many wealthy people and corporations became wealthier during the pandemic. recent statistic show the usa has the most billionaires.
why is anyone surprised that others want a piece of the action?
and now those billionaires have created laws to punish others seeking to cash in on their action.