Petition Calling For Resignation Of U.S. Securities/Exchange Commission Chair Gary Gensler
(1-22-2021) Five Reasons The SEC Should Approve Spot Bitcoin ETFs. Petition Calling For Resignation Of U.S. Securities/Exchange Commission Chair Gary Gensler
The evidence shows that investors would prefer to invest in cryptocurrencies through a spot vs futures-based exchange-traded fund.
Ultimate Resource On Insider Trading (Congress, Senators, Corporate America)
Ultimate Resource On BlockFi, Celsius And Nexo (Including Regulatory Scrutiny From States And The SEC)
The SEC is seen as dragging its feet unnecessarily on the issue of approving ETFs that focus on cryptocurrencies. An informal Twitter poll I recently conducted found that almost 80% of the 2,192 people who responded believe the SEC should approve a bitcoin ETF.
About 50% would invest in one. I’ve been doing these polls for years and this is the highest by far in favor of approval.
My poll lines up nicely with a Bitwise survey of financial advisors. In that one, 63% of respondents said an ETF was the preferred vehicle to invest in Bitcoin, compared with 16% for directly owning the digital coin and 10% for a mutual fund.
People say this not as crypto advocates but as fans and users of the very durable and efficient ETF structure. They would feel the same way if the SEC denied a gold ETF or a China A-share ETF, both of which are great examples of ETFs breaking new ground and successfully democratizing a unique asset class.
Here Are Five Reasons The Sec Should Approve An ETF:
The Premium (Now a discount) in Grayscale Bitcoin Investment Trust is Dangerous: Those seeking a U.S.-based investment vehicle for the digital currency are generally left with a bunch of OTC-traded trusts similar to closed-end funds but without the crucial share creation or redemption process offered by an ETF – a feature that allows for arbitrage.
The most popular is the Grayscale Bitcoin Investment Trust, which has grown from $2 billion to more than $20 billion in assets over the last year. If Grayscale was an ETF, it would rank about 50th in size, putting it in the top 2% of all ETFs.
Those that bought shares of the trust over the last year paid an average premium of about 18% more than the value of Bitcoin — and that’s on the low side of where it has traded historically. The premium has been as high as 132% and as low as 3% in recent years.
In an ETF, investors know they are getting a price that is going to be very close to the underlying asset.
Of course, a Bitcoin ETF would also likely trade at premium, but it would be microscopic compared with where Grayscale trades. It also would not be subject to artificial forces that tend to push the price of Grayscale’s shares lower even if the price of Bitcoin is rising and vice-versa.
History shows us that the premium in an ETF would steadily shrink as more and more professional market-makers get involved.
They’ve Worked Fine in Europe: More than 20 cryptocurrency ETFs already exist outside the U.S., mostly in Europe. Exchange-traded notes such as the Bitcoin Tracker EUR introduced in Sweden over five years ago have typically trade at miniscule premiums thanks to the arbitrage allowed by the share creation/redemption process.
Although a U.S. Bitcoin ETF would be a much bigger deal in terms of volume and assets, it would effectively work the same.
And although the premiums and discounts to net asset values are wider than most equity ETFs, they are pretty tight all around and much tighter than Grayscale and the like.
The steep run up – and then down – in Bitcoin prices provided a case study in how a U.S. Bitcoin ETF would react to such sharp moves. Looking at the lot of ETFs and ETNs in Europe, most ended Jan. 11 (following a two-day 17.6% plunge in Bitcoin) at a 3% to 4% discount to net asset value.
Clearly, the “arbitrage band” was stretched but it didn’t break. Those who wanted to exit, could. Put that in the U.S. with the biggest and best market makers and my guess is that the discount would have been half as much.
There Are Plenty More Volatile ETFs: Although there’s no precedent for an ETF tracking a digital asset, the SEC has approved vehicles that are arguably more dangerous in terms of volatility. There are about 70 ETFs that are more volatile than Bitcoin.
For example, an ETF approved and launched less than a year ago, the Direxion Daily S&P 500 High Beta Bear 3X Shares ETF, has a 60-day standard deviation between 100% and 200% – depending on the month – while the Swedish Bitcoin ETN is between 25% and 100%.
It Would Be Obvious What It Is: The risks of a Bitcoin ETF are obvious to average investors, as most have at least some knowledge of cryptocurrencies as being new, alternative and volatile. That suggests it would be less apt to result in a nasty surprise for unknowing investors, which has happened in the past with certain ETFs.
One example is the United States Oil ETF, which is akin to a wolf in sheep’s clothing: It has a vanilla name and looks pretty innocent, but it holds futures contracts and most don’t understand how big the costs of “rolling” those contracts can get.
Second, the broader Bitcoin market, which the SEC has said is prone to manipulation and fraud, is becoming more efficient with bigger institutions participating. If anything, having an ETF will speed this along and further help transparency and foster better surveillance of crypto exchanges as they’d compete to attract professional market makers.
No Worries About Remembering Password: One reason why investors love ETFs is because they are convenient. Any individual investor could replicate any ETF — they literally tell you what they hold every day – and save the expense ratio, but most investors want the convenience.
As an added bonus, investors don’t have to worry about losing passwords to digital wallets; they just need to be able to log into a brokerage account.
And please don’t ask me about the 4.6% that don’t think the SEC should approve a bitcoin ETF but would invest in one if they did. That’s a special kind of person
Please see my “Ultimate Resource For A Bitcoin ETF (#GotBitcoin)”
U.S. Homeland Security Found SEC Had ‘Critical’ Cyber Weaknesses In January
The U.S. Department of Homeland Security detected five “critical” cyber security weaknesses on the Securities and Exchange Commission’s computers as of January 23, 2017, according to a confidential weekly report reviewed by Reuters.
The report’s findings raise fresh questions about a 2016 cyber breach into the U.S. market regulator’s corporate filing system known as “EDGAR.” SEC Chairman Jay Clayton disclosed late Wednesday that the agency learned in August 2017 that hackers may have exploited the 2016 incident for illegal insider-trading.
The January DHS report, which shows its weekly findings after scanning computers for cyber weaknesses across most of the federal civilian government agencies, revealed that the SEC at the time had the fourth most “critical” vulnerabilities.
It was not clear if the vulnerabilities detected by DHS are directly related to the cyber breach disclosed by the SEC. But it shows that even after the SEC says it patched “promptly” the software vulnerability after the 2016 hack, critical vulnerabilities still plagued the regulator’s systems.
The hack, two weeks after credit-reporting company Equifax EFX.N said hackers had stolen data on more than 143 million U.S. customers, has sent shockwaves through the U.S. financial sector.
An SEC spokesman did not have any comment on the report’s findings.
It is unclear if any of those critical vulnerabilities, detected after a scan of 114 SEC computers and devices, still pose a threat.
During the Obama administration, such scans were done on a weekly basis.
“I absolutely think any critical vulnerability like that should be acted on immediately,” said Tony Scott, the former federal chief information officer during the Obama administration who now runs his own cybersecurity consulting firm.
“This is what was at the root of the Equifax hack. There was a critical vulnerability that went unpatched for some long period of time. And if you’re a hacker, you are going to … try to see if you can exploit it in some fashion or another. So there is a race against the clock.”
For the past several years, the Department of Homeland Security has been producing a report known as the “Federal Cyber Exposure Scorecard.” It provides a weekly snapshot to more than 80 civilian government agencies about potential outstanding cyber weaknesses and how long they have persisted without being patched.
A directive by Homeland Security requires agencies to address critical vulnerabilities within 30 days, though sometimes that deadline can be difficult to meet if it might disrupt a government system.
The January snapshot shows improvements have been made across the government since May 2015, when there were a total of 363 critical vulnerabilities on devices across all of the civilian agencies, according to the report.
As of January 23, by contrast, there were a total of 40 critical vulnerabilities across the agencies reviewed by DHS and another 280 weaknesses categorized as “active high,” which is the second more severe category.
The top four agencies with the most “critical” vulnerabilities as of January 23 included the Environmental Protection Agency, the Department of Health and Human Services, the General Services Administration and the SEC.
However, more vulnerabilities do not necessarily mean one agency is worse than another because things depend on how many computers or devices known as “hosts” were scanned and what kinds of information could potentially be exposed.
All it takes is one,” Scott said. “You can have one host and one vulnerability and your risk might be 10 times as high as someone who has 10 hosts and ten vulnerabilities.”
SEC Brings Charges In EDGAR Hacking Case
The Securities and Exchange Commission today announced charges against nine defendants for participating in a previously disclosed scheme to hack into the SEC’s EDGAR system and extract nonpublic information to use for illegal trading. The SEC charged a Ukrainian hacker, six individual traders in California, Ukraine, and Russia, and two entities.
The hacker and some of the traders were also involved in a similar scheme to hack into newswire services and trade on information that had not yet been released to the public. The SEC charged the hacker and other traders for that conduct in 2015 (see here, here and here).
The SEC’s complaint alleges that after hacking the newswire services, Ukrainian hacker Oleksandr Ieremenko turned his attention to EDGAR and, using deceptive hacking techniques, gained access in 2016. Ieremenko extracted EDGAR files containing nonpublic earnings results.
The information was passed to individuals who used it to trade in the narrow window between when the files were extracted from SEC systems and when the companies released the information to the public. In total, the traders traded before at least 157 earnings releases from May to October 2016 and generated at least $4.1 million in illegal profits.
“International computer hacking schemes like the one we charged today pose an ever-present risk to organizations that possess valuable information,” said Enforcement Division Co-Director Stephanie Avakian. “Today’s action shows the SEC’s commitment and ability to unravel these schemes and identify the perpetrators even when they operate from outside our borders.”
“The trader defendants charged today are alleged to have taken multiple steps to conceal their fraud, including using an offshore entity and nominee accounts to place trades,” said Enforcement Division Co-Director Steven Peikin. “Our staff’s sophisticated analysis of the defendants’ trading exposed the common element behind their success, providing overwhelming evidence that each of them traded based on information hacked from EDGAR.”
The SEC’s complaint alleges that Ieremenko circumvented EDGAR controls that require user authentication and then navigated within the EDGAR system. Ieremenko obtained nonpublic “test files,” which issuers can elect to submit in advance of making their official filings to help make sure EDGAR will process the filings as intended.
Issuers sometimes elected to include nonpublic information in test filings, such as actual quarterly earnings results not yet released to the public. Ieremenko extracted nonpublic test files from SEC servers, and then passed the information to different groups of traders.
The SEC’s Complaint Alleges That The Following Traders Received And Traded On The Basis Of The Hacked EDGAR Information:
• Sungjin Cho, Los Angeles, California
• David Kwon, Los Angeles, California
• Igor Sabodakha, Ukraine
• Victoria Vorochek, Ukraine
• Ivan Olefir, Ukraine
• Andrey Sarafanov, Russia
• Capyield Systems, Ltd. (owned by Olefir)
• Spirit Trade Ltd.
In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced related criminal charges.
The SEC’s complaint charges each of the defendants with violating the federal securities antifraud laws and related SEC antifraud rules and seeks a final judgment ordering the defendants to pay penalties, return their ill-gotten gains with prejudgment interest, and enjoining them from committing future violations of the antifraud laws.
The SEC also named and is seeking relief from four relief defendants who profited from the scheme when defendants used the relief defendants’ brokerage accounts to place illicit trades.
The SEC’s investigation, which is ongoing, was conducted by Market Abuse Unit and Cyber Unit staff David Bennett, Arsen Ablaev, Michael Baker, Jason Burt, Laura D’Allaird, Adam Gottlieb, James Scoggins, David Snyder, Jonathan Warner, Darren Boerner, John Marino, and John Rymas, and IT Forensics staff Ken Zavos, Douglas Bond, Stephen Haupt, Gi Nguyen, and Jennifer Ross.
The Division of Economic and Risk Analysis and the Office of Information Technology provided substantial assistance. The investigation was supervised by Robert Cohen, Joseph Sansone, and Carolyn Welshhans. Cheryl Crumpton and Stephan Schlegelmilch are leading the SEC’s litigation. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey, the Federal Bureau of Investigation, and the U.S. Secret Service.
How A Russian Exec Hacked U.S. Securities And Exchange Commission To Get Tesla, IBM (Over 165 Other Companies) Earnings Early
It’s one of the largest hackings of inside information on stocks ever charged, and the case is likely to shine an uncomfortable light on an obscure but crucial industry that handles the market’s most-sensitive information.
Hackers have found a new way to get their hands on inside information for stock trading.
Two indictments unsealed last month in Boston’s federal court said that a group led by a Russian cybersecurity executive stole early looks at unannounced earnings—making over $82 million trading ahead of unreleased announcements from Tesla (ticker: TSLA), Microsoft (MSFT), IBM (IBM), and over 165 other companies.
But Vladislav Klyushin and his four co-defendants aren’t alleged to have hacked those companies. Instead, prosecutors charge that the hackers targeted a little-known choke point for market-moving information: two firms that thousands of public companies use to make electronic filings with the U.S. Securities and Exchange Commission.
Charging documents from the Department of Justice, and a parallel civil case by the SEC, conceal the names of the two filing services. The SEC complaint describes “Servicer A” as a Chicago-based company, and “Servicer B” as a division of a foreign company.
Barron’s was able to determine that Servicer A is Chicago-based Donnelley Financial Solutions (DFIN), while Servicer B is the Toppan Merrill unit of Japan’s Toppan (TOPPY). That’s because the SEC’s public archive, known as Edgar, has digital copies of the earnings announcements mentioned in the criminal case, and each filing names the responsible filing service.
Federal prosecutors in Boston allege that the Klyushin group stole computer passwords from the filing agents’ employees and then roamed the firms’ networks from 2017 through 2020 to steal copies of more than 500 unannounced earnings drafts.
After his arrest in Switzerland and extradition to Boston, Klyushin pleaded not guilty at his Jan. 8 arraignment before U.S. Magistrate Judge Marianne Bowler. The judge declined to release him on bail. His co-defendants remain at large and aren’t represented in court.
Toppan Merrill acknowledged to Barron’s that it is one of the filing agents described in the indictments of the hacking ring.
“Toppan Merrill has been cooperating fully with government authorities in support of their investigations in this matter,” the company’s general counsel Lisa Bilcik wrote in an email.
“We have communicated with the limited set of customers whose information was allegedly accessed and used in the illegal trading scheme.” Toppan Merrill declined to comment further.
Donnelley Financial did not respond to repeated requests for comment, and it has never publicly spoken about the hacking cases. Its website, DFIN—as Donnelley Financial now styles itself—tells potential customers that its ActiveDisclosure system is secure.
“Unsurpassed security gives you peace of mind,” says the website. “At DFIN, we successfully handle some of the most sensitive documents in the world thanks to our best-in-class security architecture and fraud detection solutions.”
Donnelley Financial and Toppan Merrill are remnants of a once-thriving financial printing industry, relied upon by Wall Street to confidentially prepare the prospectuses, proxies, and sensitive announcements of public companies.
As ink and paper gave way to electronic files, financial printers evolved into software suppliers hired by public companies and investment funds to securely format and submit the SEC filings that contain some of the most actionable trading information on the planet.
The Donnelley Financial business was spun off in 2016 from R.R. Donnelley & Sons (RRD)—the 150-year-old Chicago firm that had been America’s largest printer, producing catalogs for Sears Roebuck and magazines for Time Inc.
The first-known infiltration of the filing agent’s systems was in October 2017, according to prosecutors: a year after Donnelley Financial first traded on the New York Stock Exchange for $28 a share.
Nearly every public company now uses the software systems of three firms: Donnelley Financial, Toppan Merrill, or the Ames, Iowa–based Workiva (WK).
At Workiva, the filing firm that wasn’t involved with the alleged hacks, its chief information security officer, Eric Anders, expressed sympathy for his rivals. “Let’s be clear,” he blogged, after the unsealing of the hacking case, “[N]o company is completely immune to attack, and anyone who promises otherwise is lying.”
In a March 2021 affidavit filed by prosecutors to obtain Klyushin’s arrest warrant, Federal Bureau of Investigation agent B.J. Kang alleged that the hacking group penetrated one of the filing agents in November 2018, and used inside information to buy or sell short shares of its clients, including IBM, Avnet (AVT), Steel Dynamics (STLD) and 3M (MMM). Public filings at the SEC show that those firms were clients of Toppan Merrill.
Infiltration of the second filing agent began in 2017, Kang alleged, allowing the conspirators to trade ahead of the announcements of a long list of that filing service’s customers, which included Tesla, Grubhub, Nielsen Holdings (NLSN), Kohl’s (KSS), Hexcel (HXL), Roku (ROKU), HubSpot (HUBS), Martin Marietta Materials (MLM), and Snap (SNAP).
The SEC Edgar database shows that Donnelley Financial was the filing agent for those companies, and dozens of others mentioned in the FBI affidavit.
Barron’s queried the public companies whose announcements were alleged to have been stolen. Only Nielsen Holdings would comment, saying that the charges unsealed in December were its first notice of the alleged inside trading. Nielsen says it has asked for more information from its filing agent, Donnelley Financial.
One of the four co-defendants alleged to have carried out the intrusions, Ivan Yermakov (or “Ermakov”), worked for Klyushin’s Moscow-based cybersecurity firm, M-13, prosecutors say. The 35-year-old Yermakov, they say, is a veteran of the Russian military intelligence agency known by the initials GRU.
While at GRU, according to a 2018 federal indictment, Yermakov infiltrated the computers of the Democratic Party and the campaign of Hillary Clinton, ahead of the 2016 elections.
A second indictment in 2018 charged him with hacking antidoping agencies, sports federations, and antidoping officials, as well as the nuclear reactor unit of Westinghouse Electric, the international agency against chemical weapons, and a lab that had investigated suspected Russian poisonings in the United Kingdom.
Yermakov remains at large, and no charges were lodged against M-13.
The U.S. Treasury sanctioned Yermakov in 2018 for his alleged hacking of the 2016 election, and an FBI wanted poster seeks him for the election and sports-doping-related allegations. No attorney has appeared for him in any of the U.S. proceedings, including the recent stock trading cases.
Yermakov appears never to have commented publicly on his U.S. indictments, and his social media accounts were closed down after the first case filings.
The M-13 cybersecurity firm where Klyushin employed Yermakov is hired by its clients to attempt computer attacks in an exercise known as penetration testing, according to its website. The website listed clients that include Russian government agencies and the office of President Vladimir Putin. In June 2020, Putin awarded Klyushin a national medal of honor. M-13 did not respond to requests for comment.
Klyushin’s activities have left him well off, say prosecutors. In arguing that he posed a flight risk if released on bail, prosecutors presented photos they say Klyushin sent Yermakov, showing a safe with an estimated $3 million in $100 bills. Klyushin has a $2 million London apartment and a $4 million yacht, according to court filings.
The attorney representing Klyushin in the federal criminal case did not respond to queries. Letters to Judge Bowler, purporting to come from Klyushin’s employees, praised Klyushin’s fairness and generosity, saying that he paid their medical bills and took them on retreats to resorts like the Russian city of Sochi.
He paid to repair the roof of Moscow’s Sretensky Monastery, said one writer, and loved pets and nature. “I can’t imagine a situation in which Vladislav could hurt someone or wish evil,” wrote his second wife, Zhannetta Kliushina. “Vladislav cannot commit what he is accused of.”
Previous criminal cases have charged overseas hackers with stealing advance knowledge of market-moving information from public relations newswires, the SEC itself, or from merger-and-acquisition lawyers. Only the illicit gains alleged in the newswires case exceeded the $82.5 million that Klyushin and his co-defendants are charged with reaping.
According to the latest federal charges, Yermakov stole log-in credentials from employees of the two filing agents and installed malware that allowed him to query their networks from over 100 rotating, anonymous internet addresses associated with locations around the world.
He had bought and established the fictitious addresses using cryptocurrency to cover his tracks, say prosecutors. Klyushin and others allegedly traded on the stolen information in the hours and days before the announcements became public. A statistical analysis by the SEC claims that the probability that the group would have traded as it did around the companies’ earnings–by chance alone–is one in a trillion.
In prosecutors’ filings, they cite an array of evidence that includes photos and text messages exchanged by Klyushin, Yermakov, and their associates, as well as trading records from Interactive Brokers Group (IBKR) and brokers in the U.K., Denmark, Russia, Cyprus, and Portugal. None of the brokers have been accused of wrongdoing.
In a June 2020 exchange of texts, prosecutors say, Yermakov told Klyushin that they needed to go to work to make money to buy an apartment. Klyushin responded that there was no need to do that, because they just had to “turn on the computer” to make money, according to prosecutors.
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