Members of Congress tried to stop the SEC’s investigation of FTX
The Securities and Exchange Commission sought information from collapsed cryptocurrency exchange FTX earlier this year, Prospectus has confirmed, bringing a new perspective to an effort by a bipartisan group of congressmen to slow this investigation.
The March letter from eight members of the House — four Democrats and four Republicans — questioned the SEC’s authority to make informal inquiries of crypto and blockchain companies, suggesting the requests violated federal law.
Rep. Tom Emmer (R-MN), whom the Republican caucus just elected as majority whip, number three in the House leadership, led the letter. In a simultaneous Twitter threadwrote Emmer: “My office has received many tips from crypto and blockchain firms as an SEC executive @GaryGensler‘s information reporting ‘requests’ to the crypto community are overburdening, don’t feel particularly … voluntary … and stifle innovation.”
We now know that FTX was one of the firms that received information requests from the SEC, about the very activities that have brought down the firm. This raises the question of whether Emmer and the other members of Congress were acting on behalf of FTX (which has been credibly accused of taking customer money to make risky bets) to try to cool an ongoing investigation by an independent regulatory and law enforcement agency.
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Some of the “Blockchain Eight”, which Prospectus called them in March, have benefited from crypto largesse. Five of the eight members received campaign donations from FTX employees, ranging from $2,900 to $11,600. Rep. Ted Budd (R-NC), one of the signatories, received half a million dollars in support from a Super PAC created by FTX co-CEO Ryan Salame.
More consistently, Emmer chaired the National Republican Congressional Committee, the campaign arm of House Republicans, this year. NRCC’s affiliate super PAC, the Congressional Leadership Fund, received $2.75 million from FTX in the 2022 cycle; $2 million from Salame at the end of September, and $750,000 from the company’s political action committee.
That money helped House Republicans win the majority in 2022. Although FTX has been portrayed as a Democratic firm, thanks to the high profile of former co-CEO Sam Bankman-Fried, the company brushed off campaign donations fairly evenly, a shade over 50 percent going directly to congressional Republicans and a shade under 50 percent to Democrats this cycle.
In an email, the SEC declined to comment. Six of the eight members of Congress have not yet responded to the matter Prospectustheir inquiries.
Rep. Byron Donalds (R-FL) said through a spokesperson that the congressman did not seek to influence ongoing investigations at the SEC, and did not exchange any communications with FTX. He was only concerned with the SEC’s procedure and guidance with crypto firms, which some have described as “regulation by enforcement.” Donalds was not one of the members who received donations from FTX.
Matt Corridoni, a spokesman for Rep. Jake Auchincloss (D-MA), another of the signatories, said Prospectus, “Congressman has been clear from day one that crypto needs strong and clear laws from Congress. The SEC will have to explain to Congress why, despite claiming it didn’t need new laws for exchanges, it failed to foresee this collapse.” He added that FTX never directly lobbied Rep. Auchincloss’ office to join the letter.
A source with knowledge of the situation confirmed to Prospectus that FTX and Coinbase were two of the firms that received inquiries from the SEC.
Reuters REPORTED LAST FRIDAY on an internal FTX document, which shows that earlier this year the SEC had made informal inquiries to FTX and other firms about how they handled customer deposits. As we now know, FTX sent client funds to its affiliate trading firm Alameda Research. Newly installed FTX CEO John Ray told a bankruptcy court last week of a “complete lack of corporate control” at the company.
The SEC also asked FTX about a rewards program that gave depositors interest on their crypto assets, which could turn them into a security. SEC chairman Gary Gensler has been adamant that crypto platforms trade and mint securities, and that these securities had to be registered with the agency. Crypto firms have generally failed to register anything.
In response to the inquiry, FTX claimed that the reward program did not involve any lending and was overboard. The SEC then responded that it did not need additional information “at this time.”
A source with knowledge of the situation confirmed to Prospectus that FTX and Coinbase, a US-based crypto exchange, were two of the firms that received inquiries from the SEC.
Emmer and his colleagues questioned the SEC’s inquiries in March. The letter condemned the “recent trend toward using … investigative functions to gather information from unregulated cryptocurrency and blockchain industry participants in a manner inconsistent with the commission’s standards for initiating investigations,” suggesting the requests violated the Paperwork Reduction Act, even though that law does not apply to enforcement investigations. It asked the SEC detailed questions about the information requests.
The eight members were reps. Emmer, Donalds, Auchincloss, Warren Davidson (R-OH), Ted Budd (R-NC), Darren Soto (D-FL), Josh Gottheimer (D-NJ) and Ritchie Torres (D-NY). Budd was this year elected to the US Senate.
Emmer made it clear in March Twitter thread that the letter was based on complaints from crypto firms and that his intent was to stop the SEC from making those inquiries. “Crypto startups must not be burdened with extra-jurisdictional and burdensome reporting requirements,” Emmer wrote. “We want to make sure our regulators don’t kill American innovation and opportunity.”
On the flip side, Emmer was quick to praise Bankman-Fried for his integrity and adherence to the law. In December 2021, Bankman-Fried testified before Congress, and Emmer told him“Sounds like you do a lot to make sure there is no fraud or other manipulation.”
Emmer and Gottheimer led the Blockchain Eight in donations from FTX, each receiving $11,600. FTX was in the top 15 of Emmer’s biggest donors in the 2022 cycle. Auchincloss received $6,800, and Budd and Torres received $2,900.
Coinbase has also contributed to members of the Blockchain Eight. Emmer received $2,900 from Coinbase’s PAC in 2022; Gottheimer received $2,900 from a Coinbase employee, and Auchincloss received $2,000.
Budd was the recipient of approximately $517,000 in spending from co-CEO Salame’s Super PAC, American Dream Federal Action.
But the millions in funds from FTX’s PAC and Salame to the House Republicans’ Congressional Leadership Fund dwarf the spending of individual candidates. As the lead signer of the letter and the member who said he had received “tips” from crypto firms that informed that letter, and as head of the House Republicans’ campaign arm, Emmer had the most to gain from a large donation to help the GOP win the majority. “We delivered,” Emmer said after the majority was secured.
Salame gave $23.6 million to exclusively Republican candidates and causes in the 2022 cycle, unlike Bankman-Fried, whose $40 million went to Democrats. A handful of members, including Reps. Chuy García (D-IL) and Kevin Hern (R-OK), have returned FTX donations, and Sens. Dick Durbin (D-IL) and Kirsten Gillibrand (D-NY) have donated contributions to charity. None of the Blockchain Eight have yet said what they would do with their own FTX donations.
The disaster at FTX has not stopped Emmer from continuing to boost crypto.
THE UNORTHODOX LETTER IS ANALOGUE to the “Keating Five” scandal of 1987. Subsequently, five senators (including a young Arizona Republican named John McCain) pressured the Federal Home Loan Bank Board (FHLBB) to drop an investigation into Lincoln Savings and Loan and its chairman Charles Keating Jr. Keating was a donor to all five senators, giving $1.3 million over the years.
The FHLBB ended its investigation of Keating and Lincoln Savings and Loan, just before it failed, costing the federal government $3.4 billion as part of the $125 billion S&L bailout. Keating was convicted of fraud and served prison time. The Senate Ethics Committee found that three members improperly interfered in a federal investigation; McCain was cleared while he was found to have exercised “poor judgment.”
The aftermath of the letter has also mirrored the Keating Five situation. While the SEC conducted its informal investigation, it did not uncover the potentially fraudulent activity at FTX. It is at least possible that pressure from members of Congress deterred the SEC from probing further. Then, like Lincoln Savings, FTX imploded, leaving depositors high and dry.
But the disaster at FTX hasn’t stopped Emmer from continuing to boost crypto. At an event with crypto trade group Blockchain Association last week, Emmer told the assembled crypto honchos, “You’re here to stay,” and that nobody should “rush in and put a huge wet blanket of regulation on top of this industry just because something didn’t go right.”
In March, the Blockchain Association became applauded the two-part letter, which said “champions” like Emmer made America “a leader in crypto innovation.” The Blockchain Association’s director of government affairs, Ron Hammond, was the former fiscal director of Rep. Davidson, one of the letter’s signatories.
In the wake of the collapse, Emmer has implied that the SEC’s Gensler and FTX were “work[ing] about legal loopholes to achieve a regulatory monopoly.” With such comments, Emmer plays into conspiracy theories that Gensler had ties to the firm and operated in its interests.
These claims are far-fetched. A “six degrees of separation” theory involves Gensler working briefly at MIT with the father of Caroline Ellison, Bankman-Fried’s former lover and CEO of Alameda Research. Another notes that Mark Wetjen, a former member of the Commodity Futures Trading Commission when Gensler was chairman during the Obama years, was hired as FTX’s chief lobbyist, and met with Gensler once.
But Gensler and Wetjen didn’t see eye-to-eye at the CFTC, and FTX actively tried to get legislation passed to strip Gensler and the SEC of its authority over crypto.
Other Blockchain Eight Republicans have also criticized Gensler. “At this point, it’s hard to believe that @SECgov has not engaged in selective enforcement,” Rep. Davidson wrote on Twitter last week.
Given that FTX was under investigation by the SEC in March, when Davidson and Emmer actively worked publicly to shut down the investigation, arguing that it was illegal for the SEC to investigate crypto firms that way, their claims that the SEC was doing its job are absolutely interesting. The SEC was told not to investigate, and is now being told that it was investigating selectively.
The House Financial Services Committee has announced hearings during the lame-duck session on the FTX collapse. Emmer, Torres, Gottheimer, Auchincloss, Davidson and Budd are all members of that committee. Unfortunately, they are not forced to answer the questions.
