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Former SEC Senior Counsel Discusses the Digital Assets Space (Part One of Two)

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Former SEC Senior Counsel Discusses the Digital Assets Space (Part One of Two) HFLR.com March 7, 2019 SEC ENFORCEMENT MATTERS Former SEC Senior Counsel Discusses the Digital Assets Space (Part One of Two) By Robin L. Barton, Hedge Fund Law Report Philip Moustakis, most recently a Senior in assets based on blockchain or distributed Counsel at the SEC, has joined Seward & ledger technology, including cryptocurrencies, Kissel as counsel. He will work closely with utility coins and tokens. The Hedge Fund several practice areas in New York and Law Report recently interviewed Moustakis Washington, D.C., including the government in connection with his move to Seward & enforcement and internal investigations; SõĴĴÕĆʣñõĴţİĴļ²İļõËĆÕõčĔŁİļŖĔʴĭ²İļĴÕİõÕĴ investment management; and blockchain and summarizes his thoughts on his experience cryptocurrency groups. in the government, as well as the regulatory approach to digital assets and blockchain. For more than a decade, Moustakis was Senior The second article will explore enforcement Counsel in the SEC’s Division of Enforcement, trends in general and in the digital asset space in which role he investigated and prosecuted ĴĭÕËõţ˲ĆĆŘʞ²ĆĔčëŖõļñŖñõĴļĆÕÊĆĔŖÕİĴʣ complex matters involving violations of the federal securities laws. He also served a For additional insight from other Seward & lengthy tenure in the Asset Management Unit Kissel attorneys, see “ With the Filing Deadline and was a founding member of the Cyber Looming for Many Advisers, Seward & Kissel Unit, where he focused on cryptocurrencies Attorneys Provide a Roadmap to Amended and initial coin offerings (ICOs). In addition, Form ADV ʽʰ\²İʣʅʞɿɽɾʅʱʨ²čÑĔŁİļŖĔʴĭ²İļ Moustakis was a founding member of the series “HFLR and Seward & Kissel Webinar Distributed Ledger Technology Working &ŗĭĆĔİÕĴİÕčÑĴEÑÕčļõţÕÑõčõÑÕVÕļļÕİ Group, which was formed to coordinate the Study”: Part One (Nov. 16, 2017); and Part Two response to the emerging technology across (Nov. 30, 2017). ļñÕ&ʿĴÑõŕõĴõĔčĴ²čÑĔêţËÕĴʣ|İõĔİļĔñõĴļõČÕ at the SEC, he served as an Assistant Attorney Governmental Experience General in the Investor Protection Bureau of ļñÕ]ÕŖ§ĔİăļļĔİčÕŘ;ÕčÕݲĆʿĴcêţËÕʣ HFLR: You spent years working in legal roles in both the state and federal governments. At Seward & Kissel, Moustakis will advise What made you decide to leave government companies and individuals on SEC service and go into private practice in general enforcement matters, internal investigations ²čÑļĔÕŖ²İÑ˯SõĴĴÕĆĴĭÕËõţ˲ĆĆŘʤ and other regulatory and criminal matters, as well as on issues arising from investments Moustakis: I worked for the government for ©2019 Hedge Fund Law Report. All rights reserved. 1 HFLR.com almost 15 years and performed public service HFLR: What kind of matters did you work on êĔݲÊĔŁļɾʅĔêČŘţİĴļɿɽŘÕ²İĴĔŁļĔêĆ²Ŗ ŖñõĆÕ²ļļñÕ&ʿĴ&čêĔİËÕČÕčļ"õŕõĴõĔčʤ school. In terms of the SEC, I felt like I had a great run, wore a number of hats and had the Moustakis: When you join the Enforcement opportunity to handle many interesting cases, Division, you start out as a generalist. You walk but it was time to move on. I had squeezed all in the door and are handed a Ponzi scheme, an the juice out of that orange. offering fraud or something similar. Once you demonstrate your abilities on those kinds of At Seward & Kissel, I will work primarily cases, you are given the opportunity to handle with the government enforcement and more complex, sophisticated or sensitive internal investigations group; the investment Č²ļļÕİĴ²čÑļĔāĔõčĴĭÕËõ²ĆļŘŁčõļĴʣñÕţİĴļ management group; and the blockchain and such unit I joined was the Asset Management cryptocurrency group. What attracted me Unit and later the Cyber Unit. to Seward & Kissel is that they already have a deep bench of excellent lawyers working [See “ Ĕʴ"õİÕËļĔİĔê&&čêĔİËÕČÕčļ"õŕõĴõĔč in these groups, from whom I could learn a Champions New Retail Strategy Task Force and great deal. Conversely, with my extensive SEC Cyber Unit” (Nov. 16, 2017).] experience, I felt that I could bring a valuable čÕŖÑõČÕčĴõĔčļĔļñÕţİČʿĴÕŗõĴļõčëĭݲËļõËÕ I spent the bulk of my time at Enforcement in in these areas. the Asset Management Unit, where I gained broad experience prosecuting matters against HFLR: Before you joined the SEC, you worked investment advisers to private funds and êĔİļñÕ]ÕŖ§ĔİăļļĔİčÕŘ;ÕčÕݲĆʿĴcêţËÕʣ mutual fund complexes. For example, I served Please describe the work you did there. ²ĴËĔʴĆÕ²ÑĔč²čõčŕÕĴļõë²ļõĔčĔê²ĭİõŕ²ļÕêŁčÑ adviser, which led to enforcement actions Moustakis: I was in the Investor Protection against the adviser, a couple of portfolio Bureau of the New York Attorney General’s Č²č²ëÕİĴ²čÑļñÕËñõÕêţč²čËõ²ĆĔêţËÕİ ĔêţËÕʞŖñÕİÕĔŁİāĔÊŖ²ĴļĔõčŕÕĴļõë²ļÕ²čÑ for insider trading, a mismarking scheme prosecute violations of the Martin Act and and supervisory failures. [See “ Charges of other investor and consumer protection laws. Fraudulent Valuation, Insider Trading and For example, I was a member of the team that Failure to Supervise Employees Cost Manager reached what many consider to be a landmark and CFO More Than $10 Million in SEC settlement with AIG that, combined with the Settlement ” (Jun. 14, 2018).] SEC’s parallel action, required the company to pay more than $1.6 billion in restitution and I also worked on matters involving market penalties. Other investigations I worked on manipulation; valuation issues; insider focused on the İÕĴõÑÕčļõ²ĆČĔİļë²ëÕʴʲËăÕÑ trading; cherry picking; front running ; securities market , insider trading and the ŁčÑõĴËĆĔĴÕÑËĔčŤõËļĴĔêõčļÕİÕĴļ; supervisory reinsurance industry. Shortly after the change and compliance failures ; as well as matters of administration in New York, I moved over to ļñ²ļļĔŁËñÕÑĔčÊİĔăÕİʴÑÕ²ĆÕİĴʞõčĴŁİ²čËÕ the SEC. ËĔČĭ²čõÕĴ²čÑÕŗĭÕİļčÕļŖĔİăţİČĴʣ ʮÕÕĔŁİļŖĔʴĭ²İļĴÕİõÕĴʼAĔŖ²čAÕÑëÕ:ŁčÑ Managers Avoid Insider Trading Violations ©2019 Hedge Fund Law Report. All rights reserved. 2 HFLR.com When Using Expert Networks?”: Part One Digital Assets and Blockchain (Feb. 10, 2011); and Part Two (Apr. 1, 2011).] HFLR: You were a member of the Cyber HFLR: What is the impact of your state and Unit and the Distributed Ledger Technology federal government experience on your Working Group. How would you describe the ËŁİİÕčļĭݲËļõËÕ²ļÕŖ²İÑ˯SõĴĴÕĆʤ SEC’s approach to regulating the digital asset Ĵĭ²ËÕʤ Moustakis: First and foremost, I would say an SEC enforcement matter can be a complex, Moustakis: I can speak to the Enforcement even byzantine, process. It can take any Division’s approach to digital assets. In my number of turns and involve any number of the view, from the outset, Enforcement took a &ʿĴÑõŕõĴõĔčĴ²čÑĔêţËÕĴʣñÕĆõčÕêİĔČţİĴļ very thoughtful and deliberative approach to contact with the exam or enforcement staff cryptocurrencies. The early cryptocurrency to the formal order through an investigation cases out of the SEC made the very simple to litigation or resolution is rarely – if ever – a point that the securities laws apply regardless straight one. of whether an offering or investment scheme involved bitcoin or another cryptocurrency. There are many opportunities along the Faced with a very new and emerging way for advocacy. Someone with prior SEC technology, the Enforcement Division was experience is better equipped to create, able to demonstrate at a basic level how the recognize and act on those opportunities. securities laws apply. For more than a decade, I served as lead counsel on enforcement matters and have For example, the ţİĴļÕčêĔİËÕČÕčļ²ËļõĔč been through this process many, many times. in the space charged a man named Trendon Having that experience and perspective can be Shavers and his company Bitcoin Savings enormously valuable to my clients. I learned a and Trust with defrauding investors. This lot at the SEC and now have a full toolbox with was a plain vanilla Ponzi scheme – except which to advocate for Seward & Kissel’s clients. Shavers solicited the investments and paid the purported returns entirely in bitcoin, so there My experience in the New York Attorney were no U.S. dollars involved. The SEC did not ;ÕčÕݲĆʿĴĔêţËÕĴñĔŁĆÑÊÕčÕţļĔŁİËĆõÕčļĴõč take the position in that case that bitcoin itself a similar manner: subject matter expertise, was a security; it was the investment scheme knowledge of process and experience. that formed the basis of the charge. But the Moreover, clients will often have exposure point was made: just because a fraudster found on both the federal and state levels, and I can a new way to monetize an investment scheme apply a rare combination of experience to does not mean the securities laws do not helping those clients. apply. The next enforcement action applied the securities laws to an unregistered offering ĔêĴñ²İÕĴõč²ŖÕĆĆʴăčĔŖčÊõļËĔõčÊÕļļõčë game and a second unregistered offering õč²ÊõļËĔõčʴİÕĆ²ļÕÑĴĔËõ²ĆČÕÑõ²Č²İăÕļõčë ©2019 Hedge Fund Law Report. All rights reserved. 3 HFLR.com venture. Again, the message was simply that to be drawn once the focus is on ICOs is a security is a security. It doesn’t matter that between the token and the capital raise. ICOs the capital raised came in the form of bitcoins. are by and large capital raises, so they meet If you are going to offer and sell a security, the elements of investment contracts. A digital absent an applicable exemption, it must be asset offered in connection with an ICO, registered. however, may change in character over time êİĔČ²ĴÕËŁİõļŘļĔ²čĔčʴĴÕËŁİõļŘʣ Another early enforcement action applied the same logic to two online venues that [Compare “ U.S. District Court Rules That used cryptocurrencies to trade shares in Digital Tokens in Initial Coin Offerings May ËİŘĭļĔËŁİİÕčËŘʴİÕĆ²ļÕÑŕÕčļŁİÕĴʣë²õčʞõê
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