Tag Archives: Law

$1 Billion Still Missing from Bitfinex Hack

February 10, 2022 tremendousblog 1 Comment

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Last week, the U.S. government made its largest asset seizure ever: $3.6 billion worth of bitcoin.

The money came from the 2016 hack of the Bitfinex exchange. The culprits: Ilya Lichtenstein and Heather Morgan, a young couple from New York City.

Perhaps the most interesting detail in this story is that approximately 24,000 bitcoins are still missing from this hack. They would be worth over $1.1 billion at current prices.

So where are they? Perhaps percolating around the same places where Lichtenstein and Morgan laundered theirs.

The criminal complaint alleges that the couple laundered some of their stolen coins using non-fungible tokens (NFT’s). This could explain why people will pay hundreds of thousands or even millions of dollars for an image of an ape.

If two criminals work together, trading the NFT between various accounts they control at ever-increasing prices, all they need is one bagholder to come in and make the illusion real. They take his money, give him the little jpeg, and laugh all the way to the bank.

Another fascinating aspect of this story is how they were caught:

The authorities said they traced the flow of funds through the unhosted wallets and across exchanges, according to the complaint, finding transactions that landed in accounts on exchanges that the two alleged launderers had in their real names. In one instance, according to the complaint, two of these accounts shared a login from the same location in New York.

This is a common mistake: mixing anonymous and real identities. Ross Ulbricht, creator of the Silk Road, did this by logging into his private VPN and his personal Gmail account from the same cafe in San Francisco.

If authorities find a pattern that when an anonymous account is used, your account also tends to be used from the same IP address, you’re going down.

In all, I think this case is good for the crypto industry. The less it seems like a free-for-all, the more legitimate it becomes.

The more legitimate it becomes, the broader adoption will be.

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Plaintiffs Fight Back in Citadel Lawsuit

November 11, 2021 tremendousblog 1 Comment

The small investors suing Citadel Securities LLC are fighting back against its motion to dismiss their case:

Plaintiffs suing Citadel Securities and others over trading restrictions on “meme stocks” have filed a motion to strike the market maker’s recent court filing that leaned on the SEC’s report to dismiss the conspiracy charges.

Describing the notice as “incomplete and misleading,” they challenged Citadel Securities about its efforts to call the court attention to conclusions set out in the SEC’s report on the retail trading mania earlier this year.

Citadel’s reliance on the SEC report to defend itself is problematic. As I wrote here last week, the report barely even covered allegations of collusion between Citadel and Robinhood Markets, Inc. in limiting trading.

The lengthy report devotes just a single paragraph to the allegations. It also takes Citadel LLC CEO Ken Griffin and Robinhood CEO Vlad Tenev at their word.

What’s more, the report has no force of law:

The legal notice further explains that while the 45-page report was simply meant to describe events, the market maker had misinterpreted the regulatory body’s bulletins which, like all staff statements, have no legal force or effect.

Despite the serious allegations against his firm, Griffin still characterizes them as “a bad comedy joke.”

But Citadel could face billions in damages if it loses. Even for someone with Griffin’s wealth, that’s no laughing matter.

Why I Just Invested in Capbase, The Startup in a Box

September 21, 2021 tremendousblog 1 Comment

Knowing who owns your company should be easy, right? Just keep a spreadsheet with the names and percentages and you’re all set!

Unfortunately, company ownership is a lot more complicated than that. Different investors buy in at different prices and different terms over time.

That’s where Capbase comes in. Capbase can handle your incorporation, capitalization table (list of company owners), stock options and a lot more. Capbase is so advanced that when you raise a fundraising round, it can automatically update your cap table as the wire transfers come in!

It’s basically a startup in a box. And it’s taking over the industry.

Very few corporations use any software solution to manage their cap table. In the future, I think all of them will. And Capbase is hard to beat.

Best of luck to this awesome team!

Explosive Claims in Lawsuit Against Robinhood

July 28, 2021 tremendousblog 1 Comment

As it prepares to IPO this week, Robinhood Markets, Inc. is facing several class action lawsuits from its users. Inside those lawsuits, an explosive claim:

High level executives and employees of Robinhood and Citadel Securities were in contact around the time Robinhood restricted trades, according to the complaint.

This lawsuit grows out of buying restrictions that Robinhood imposed on stock in AMC, GameStop, and others this January as their prices skyrocketed:

Retail investors suing Robinhood Market Inc and others over trading restrictions in the wake of a social media-fueled rally that squeezed short sellers have filed complaints seeking potentially billions in damages.
One of the proposed class actions filed on Tuesday in Miami federal court accuses Robinhood and clearing brokerage Apex Clearing Corp of acting negligently in cutting off trades in late January. The other lawsuit alleges they and others were part of an antitrust conspiracy with Citadel Securities LLC to spare the market maker losses on short bets.

Citadel plays an interesting dual role here. Citadel Securities handles many of Robinhood’s trades, but its hedge fund arm invested money in Melvin Capital, a fund that was imploding due to losses shorting meme stocks.

I see two possibilities:

Citadel Securities handles a lot of Robinhood’s trades, so Robinhood naturally talked with them about issues it was facing holding enough money to back trades in volatile stocks like AMC and GameStop.
Citadel tried to influence Robinhood to stop its users from driving up the price of meme stocks, which would hurt its positions in Melvin (and perhaps elsewhere)

I don’t think we have enough information yet to determine which it is. We need to find out what was said in conversations between Citadel Securities and Robinhood, and what contact Citadel Securities staff had with people on the hedge fund side of the firm. The lawsuit will likely expose phone records, e-mails and more that could shed light on what really happened.

That said, we definitely have at least the appearance of impropriety here. Citadel is exposing itself to a huge risk of regulatory crackdown and legal judgments. And Robinhood customers may be skeptical enough that they move on to any of the countless other brokerages available.

Major financial institutions are in the habit of saying “just trust us.” What they don’t understand is that after decades of bailouts and conflicts of interest, that’s a very hard sell.

China Is Killing its Tech Industry

July 5, 2021 tremendousblog 1 Comment

Major news over the holiday weekend as the Chinese government required all app stores in China to remove the Didi Chuxing app. Didi is the Chinese equivalent to Uber, and dominates shared rides in the country, along with a major presence abroad:

China has ordered app-store operators to remove the app of Didi from their stores, the latest as tension escalates between the nation’s largest ride-hailing giant and local regulators. The app has disappeared from several stores including Apple’s App Store in China, TechCrunch can confirm.
The nation’s cyberspace administration, which unveiled the order on Sunday, said Didi was illegally collecting users’ personal data.

Existing users can continue the use the app for now, but new signups are blocked. This comes just days after Didi raised billions in an IPO in New York, perhaps angering the Chinese government.

The claim of data violations seems specious. Didi’s CEO, Li Min, denies that any data is handled improperly or passed to the US.

This is part of a broader crackdown on China’s technology industry:

Alibaba Group fined $2.8 billion shortly after CEO Jack Ma criticizes the Communist Party
Fintech giant Ant Group, also founded by Jack Ma, has IPO cancelled
Bitcoin miners forced to shut down and are racing to move their servers elsewhere, including the US, as the Chinese government prepares to launch its own competing digital currency
A Chinese billionaire, many of whom are in the technology industry, dies every 40 days on average, often in suspicious “accidents” and “suicides.” Some are simply executed.

What is this doing to China’s technology industry? The damage is reflected in a massive decline in the number of “unicorns,” or startups reaching $1 billion valuation, in China. Meanwhile, the number of unicorns in the US is skyrocketing and the tech industry as a whole is hotter than ever.

China’s overall economy has also trended sharply downwards in recent years:

The Communist Party doesn’t want any competing power centers, and the Chinese tech industry, with its wealth and control of information, is perhaps the biggest alternative power center left.

But the industry needs freedom to experiment and exchange ideas, and a stable climate without the constant threat of fines, shutdowns and imprisonment. Entrepreneurs can find that here in the US, along with abundant funding. And I think you’ll see more and more of them making that jump.

AMC on the Threshold List: Strong Evidence of Naked Short Selling

June 30, 2021 tremendousblog 15 Comments

For months, investors in AMC have suspected a conspiracy by hedge funds to drive down the share price via an illegal practice called naked short selling. Strong evidence of this emerged Friday with the listing of AMC on the NYSE’s Threshold Securities list.

Let’s back up: what is naked short selling? In a normal short sale, you borrow the shares and then sell them, agreeing to return them at a later date and hoping the price drops by then, netting you a profit. Naked short selling is selling shares short (betting against the price) that you have not actually borrowed.

Naked short selling is illegal unless it’s a bona fide attempt by a market maker to meet demand. This usually occurs in thinly traded stocks. AMC is the exact opposite, and is often one of the most traded stocks in the market.

Stocks can also wind up on the Threshold List because of fail-to-delivers (trades not being completed) due to administrative errors. But the fail-to-delivers must be substantial: at least 0.5% of all shares outstanding. AMC has been on and off this list for months, along with other meme stocks like GameStop. AMC has high short interest, numerous hedge funds betting against it, and many appearances on the NYSE list. So, I think naked short selling is the likely reason for the fail-to-delivers, not innocent errors.

Naked short selling is illegal because it is a powerful way to push down a stock’s price artificially. If a seller need not even find the shares and borrow them, they can short sell any amount. They could even sell more shares than exist! And no pesky interest to pay on those borrowed shares. Naked short selling is a tool that manipulates stocks and kills investor confidence, the lifeblood of markets that allow companies to raise funds.

So what happens now?

Regulation SHO requires that participants of a registered clearing agency must immediately purchase shares to close out failures to deliver in securities with large and persistent failures to deliver, referred to as “threshold securities,” if the failures to deliver persist for 13 consecutive settlement days.

If hedge funds have to close out their short positions, that involves buying. A lot of it. This could strain the capital of funds that are already nursing wounds from betting against meme stocks, pushing them closer to the edge.

It could also cause another short squeeze, pushing AMC’s price much higher. The stock is up 28-fold so far this year, but it’s possible we ain’t seen nothin’ yet.

More great content on the threshold listing here and here.

The Mafia’s Hoboken Fortress

June 11, 2021 tremendousblog 1 Comment

On a narrow street at the edge of town sits a squat brick building. There are no windows. On the street, lookouts watch for unfamiliar faces. The few who do enter are carefully watched.

Inside: the headquarters of the most powerful mafia family in this country.

This is Casella’s Restaurant in Hoboken, NJ. In the 1980’s, it functioned as home to the Genovese crime family. Law enforcement attention had made the Genovese family’s usual haunts in Little Italy uncomfortable, and much of the family decamped to New Jersey to meet.

Casella’s was owned by Genovese soldier Martin “Mots” Casella, but the real power belonged to Louis “Bobby” Manna, consigliere of the Genovese family. As one of the top leaders, Manna held numerous meetings at this bunker-like restaurant. Another fixture was Hoboken bookie Peter “Petey Cap” Caporino, whose own social club was a few blocks away.

Genovese family consigliere Louis “Bobby” Manna

In 1987, Manna began to plot the murder of Gambino family boss John Gotti. He made those plans where he felt most comfortable: at Casella’s. Gotti had broken mafia rules by killing prior Gambino boss Paul Castellano. The Gambino family was also the Genovese’s biggest rival.

Before the hit could be carried out, the FBI tipped Gotti to the danger, likely saving his life. But how did the FBI know about the plan in the first place?

Shortly before Manna hatched the plot to murder Gotti, the FBI had done what they previously thought impossible: placed a bug inside Casella’s. It gave them the planning of the Gotti hit, the murder of associate Irwin Schiff, and a lot more.

Manna and other top Genovese members were sentenced to lengthy prison terms in a trial that was a who’s who of future political stars: NJ Attorney General Samuel Alito went on to become a Supreme Court Justice, federal prosecutor Michael Chertoff became Secretary of Homeland Security, and the judge happened to be future president Donald Trump’s elder sister.

After a sale, closures due to code violations, and a fire that destroyed the apartments above, Casella’s was finally demolished at the end of 2020. All that remains of this intriguing piece of history is a vacant lot.

I wish I could visit the old Casella’s and order a plate of pasta…if they’d let me in.

More interesting spots in New Jersey:

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Congress Is Investigating Wallstreetbets Over GameStop, But the Law’s On Their Side

March 3, 2021 tremendousblog Leave a comment

Congress is investigating whether traders on Reddit’s Wallstreetbets colluded to drive up the price of GameStop, possibily illegally. But two major legal precedents are on the side of Wallstreetbets:

In the DRW case, the CFTC argued the defendants’ orders for a swap contract were “inherently manipulative” because the defendants “understood and intended that their bids would affect the settlement price” of that contract. As the court summarized, the CFTC’s position was that the defendants “had intent to affect the prices, and because they had intent to affect the prices, that means [the prices] were illegitimate, which means that the prices were artificial.” The court rejected that logic as “circular,” concluding the government’s “theory, which taken to its logical conclusion would effectively bar market participants with open positions from ever making additional bids to pursue future transactions, finds no basis in law.”

More here.

The way I view this is people saying “You should buy GME!” on an online message board are exercising their free speech. Period.

For more on the Wallstreetbets phenomenon, check out these posts:

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Photo: “GameStop” by JeepersMedia is licensed under CC BY 2.0

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