Finance

The S.E.C.’s Crypto Crackdown Intensifies

The Winklevosses: Between a rock and a hard place.Credit…The New York Times

S.E.C. goes after “ill-gotten” crypto gains

Washington’s legal crackdown on crypto is intensifying, with the S.E.C. accusing some of the biggest names in the sector of operating an illegal lending service that racked up huge losses for customers.

The S.E.C. complaint: The agency charged the crypto lender Genesis Global Capital and its erstwhile business partner, the crypto exchange Gemini, with selling unregistered securities through a high-yield financial product called Gemini Earn. Genesis is a subsidiary of Digital Currency Group, founded by the crypto magnate Barry Silbert; Gemini is run by the billionaire twins Tyler and Cameron Winklevoss.

The firms are accused of leveraging the popularity of Gemini Earn — which promised customers a return on their investment of up to 8 percent — to raise billions. The problem: They violated securities laws by failing to adhere to “disclosure requirements designed to protect investors,” said the S.E.C. chair, Gary Gensler.

The losses are massive. The S.E.C. says 340,000 Earn customers are out of pocket by about $900 million. The complaint seeks civil penalties, injunctive relief and payback “of ill-gotten gains.” In a tweet on Thursday, Tyler Winklevoss said Earn was regulated by the New York Department of Financial Services and the company had complied with all rules. He added that the S.E.C. charges were “counterproductive” as the firms worked to recover customer funds. (Genesis did not immediately respond to a request for comment.)

Genesis and Gemini were already feuding over the funds. After the crypto exchange FTX imploded in November, Genesis froze withdrawals, leaving Earn customers stranded. Negotiations between the Winklevosses and DCG have since broken down into a nasty public spat.

The S.E.C. has zeroed in on crypto lending. Last year, the agency reached a $100 million settlement with the now-bankrupt crypto lender BlockFi. In 2021, Coinbase abandoned plans to launch a yield-generating product and blamed the S.E.C. for deeming it a security.

Meanwhile, Sam Bankman-Fried went on defense in the court of public opinion. The 30-year-old founder of FTX is facing criminal fraud charges and awaiting trial at his parents’ Silicon Valley home. He has an ankle monitor restricting his movements, but he still has internet access, and he took to Substack to reiterate a narrative that prosecutors, regulators and industry experts have previously rejected.

Bankman-Fried denied claims he siphoned billions from his companies. “I didn’t steal funds,” he wrote. Mr. Bankman-Fried pointed a finger at the law firm Sullivan & Cromwell, saying it should not be allowed to work on the FTX bankruptcy because it advised the company on transactions in the past. The firm is under increased scrutiny, including from senators, about its work as counsel to FTX.

Elsewhere in crypto:

  • Bill Ackman, C.E.O. of Pershing Square Capital Management, again came to the defense of Mr. Bankman-Fried, asking his nearly 600,000 Twitter followers not to rush to judgment.

  • The exchange Crypto.com announced it would lay off 20 percent of its staff, its second round of cuts in six months as the wider rout in crypto asset prices takes a toll.

HERE’S WHAT’S HAPPENING

Financial giants report mixed results. JPMorgan Chase and Bank of America, two of the world’s biggest banks and bellwethers for the health of the U.S. economy, beat Wall Street expectations as higher interest rates padded their bottom lines. Meanwhile, Wells Fargo and BlackRock reported revenue that fell short of forecasts. Larry Fink, C.E.O. of BlackRock, said the turbulent markets weighed on its results.

Goldman Sachs’s consumer lending unit lost more than $3 billion in the past three years. The bank revealed the losses for the first time, days after making more than 3,000 layoffs and launching its biggest cost-cutting drive since the global financial crisis. Goldman will release earnings next week.

Tesla slashes prices in the U.S. and Europe by up to 20 percent. The carmaker made the move after discounting its vehicles in China and missing Wall Street estimates for deliveries in 2022. At 7:30 a.m. Eastern, Tesla shares were down more than 5 percent in premarket trading.

Apple’s C.E.O. takes a pay cut of more than 40 percent. The iPhone maker reduced Tim Cook’s compensation to $49 million this year, down from $99.4 million in 2022, after shareholder criticism and a request from Mr. Cook himself.

A special counsel will investigate classified documents found in President Biden’s home and office. Attorney General Merrick Garland picked Robert K. Hur, a veteran prosecutor and Donald Trump appointee, to lead the inquiry in a bid to avoid accusations of partisanship.

Bye-Bye Baby?

Bed Bath & Beyond is in talks with the private equity firm Sycamore Partners to sell assets, including its Buy Buy Baby stores, as part of a possible bankruptcy process, people familiar with the matter told DealBook. The retailer is also in talks with other suitors about possible transactions.

Buy Buy Baby’s fall hasn’t been as sharp as that of its parent. The infant and children’s goods chain generated about $1 billion in sales in 2020, according to an investor presentation. And while Bed Bath & Beyond overexpanded and struggled to remain competitive, Buy Buy Baby has maintained a strong position in a clearly defined market, and its fall in sales has been less pronounced.

A spokeswoman for Bed Bath & Beyond reiterated that multiple paths “are being explored.” The company has previously said that it was considering all options.

A spokesman for Sycamore declined to comment.

Sycamore knows the distressed retail market well. The firm has bought up everything from Staples to the department store Belk and the women’s apparel retailer Talbots, and the firm’s co-founder, Stefan Kaluzny, has years of experience and relationships in the retail and consumer sectors. His interest in pieces of Bed Bath & Beyond may foreshadow the kind of deal making we will see this year if the traditional financing market remains stuck.

Bed Bath & Beyond’s stock has taken off. In shades of the meme-stock frenzy of 2021, its shares have more than tripled over the past five trading sessions, coinciding with the company’s bankruptcy warning.


“What gets me is not that we made the investment, it’s the year-and-a-half of working relationship after the investment and I still didn’t see it — and that’s difficult.”

Alfred Lin, a partner at Sequoia Capital, sharing regrets that the venture capital firm was misled in its dealings with FTX, in which it invested $225 million.


A leading tech investor’s view of the world

Prosus, the international investment arm of South Africa’s Naspers, is a global tech colossus, with a $250 billion empire that includes food delivery, online learning, e-commerce companies — and a roughly 28 percent stake in Tencent, the Chinese internet giant.

That gives Prosus a unique vantage on the global business landscape. The company’s C.E.O., Bob van Dijk, sat down with DealBook to discuss coping with the pandemic and economic slowdowns, China and more. Here are highlights from that conversation.

On shifting economic realities: Many of Prosus’s business lines — including online restaurant and grocery delivery, e-commerce, online payments and online education — flourished during the pandemic. But even as coronavirus restrictions were lifted, those divisions didn’t really suffer the sort of sharp snapback that pandemic darlings like Zoom and Peloton did, according to Mr. van Dijk. Of online food delivery, he said, “You don’t have that same surge of new customers, but you retain those customers that you’ve got and they’re growing all the time into high-frequency and high-value ones.”

But as economies across the globe slow down, Prosus has urged its portfolio companies to focus less on explosive growth and more on turning a profit. (Cost-cutting has extended to Prosus itself.) That task has become somewhat easier as others have pulled back from free-spending bids for growth, he added: “There’s less irrational competition.”

On China: Tencent suffered one of its toughest years last year, as regulators launched a wide-ranging crackdown on the tech sector and the pandemic sapped the Chinese economy.

Mr. Van Dijk said Tencent’s fortunes were improving as authorities eased their restrictions on the sector and ended their zero-Covid policy (though he largely avoided discussing how that process played out). He said he had observed “an even more pro-business shift in tone” from Beijing.

On investing: Prosus announced 69 deals over the past two years, according to PitchBook, but economic shifts, notably a rise in interest rates that’s made financing more expensive, have changed its approach. “We’ve said no to more things than we previously had,” Mr. van Dijk said. How much more selective has Prosus become? “I think we said yes to about one in 100 opportunities before. It’s probably more like one in 200 or so now.”

The slowdown in deal making may also be as much about lack of supply as lack of demand. Mr. Van Dijk said many start-ups that loaded up on capital in the past two years now want to avoid fund-raising again for fear of being forced to accept lower valuations. “That somehow needs to shake out,” he said — though he believes many of those companies might change their minds “somewhere in the next 6 to 12 months” as they run out of money.

One market where start-ups still have the upper hand: India, one of Prosus’s largest markets. “Valuations haven’t come down very much there,” Mr. van Dijk said. “India is firing on all cylinders. There literally seems to be nothing wrong there.”

THE SPEED READ

Deals

  • A secret $10 million harassment settlement payout to a former employee is reportedly complicating Tiger Global’s fund-raising for its latest venture fund. (Semafor)

  • Barry Diller’s IAC is exploring a sale of The Daily Beast, the online news publication he helped found with Tina Brown in 2008. (NYT)

  • Carlyle Group has reportedly approached Mark Mason, Citigroup’s C.F.O., and Jonathan Pruzan, Morgan Stanley’s outgoing C.O.O., about becoming its next C.E.O. (FT)

  • ConocoPhillips is reportedly in talks to sell Venezuelan oil in the U.S. to recoup some of the $10 billion it lost when its assets in Venezuela were nationalized in 2007. (WSJ)

Policy

  • West Virginia has introduced legislation that would prohibit credit card companies from using merchant category codes to monitor gun and ammunition purchases in the state. (West Virginia State Treasurer via Twitter)

  • Democratic Senators are demanding that Bob Jordan, C.E.O. of Southwest Airlines, explain why the budget airline was forced to cancel more than 16,700 flights last month. (NYT)

  • New York Republicans want Representative George Santos to resign from Congress, but national party leaders are sticking with him. (NYT)

Best of the rest

  • Starbucks told corporate staff to work from the office at least three times a week by the end of this month; News Corp said it wants Wall Street Journal and New York Post staff back too. (CNN, Insider)

  • The Manhattan penthouse apartment formerly owned by Bernie Madoff is reportedly no longer for sale after going seven months on the market without receiving a single bid. (NY Post)

  • “Back in Hong Kong — first impressions: despair and hope.” Stephen Roach, former chief economist at Morgan Stanley, on his first trip back to the city since the Covid outbreak.

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