Tom Hayes LIBOR, Clawbacks, WORMs and Crypto
TL/DR: Regulatory penalties are hard to get right. Some people get walloped, other walk away unscathed. Regulators try to design focused rules and penalties for specific malfeasance, but struggle to do so because of endless wrangling. As a result they end up resorting to broad based regs such as wire fraud, which can be easier to pin on people, but harder to make stick. This has implications for all financial markets and especially crypto.
Tom Hayes LIBOR
Tom Hayes, one of the traders given jail time for LIBOR just had his US conviction overturned (the UK ruling is still in effect). This brings to 100% the number of LIBOR traders who have been declared not guilty.
It's a long, long story, but basically it comes down to this: what the traders did was manipulating the market, but the market is big and so you can't really manipulate it; it's not like they directly harmed anyone; and they were doing what their bosses told them to do.
This also brings to $5 billion and change the amount of fines for LIBOR and to 0 the number of bosses jailed.
Wire Fraud
Also, critically, because there wasn't specific law around manipulation of interbank rates, Tom had been prosecuted under wire fraud. Wire fraud is the 1952 "updated" version of mail fraud, which was enacted in 1872--and is essentially the same with the addition of phones, radio and television.
This is a blanket regulation that says if you do something to defraud someone and use an interstate communication device, you are in trouble. It sets out in section 1343:
1343. Under the statute, it is illegal for any individual to intentionally or voluntarily use an interstate communications device, including a telephone, radio, or television, as part of any scheme to defraud another of property or anything of value.
Clawbacks
The SEC has approved a clawback rule for executive bonuses for companies that misstate their financials. This finalizes a requirement of Dodd Frank from 2015. One commissioner, Hester M. Pierce agrees that the rule was a long time coming and that executives of public companies that misstate financials should not get their full bonus.
Nevertheless, it took seven years, and Hester still doesn't like it. She thinks that there's a big difference between little "r" restatements of financials and big "R" restatements. I read what she said about this, which seems directly contrary to what the SEC comment on the same said. While I was reading, I was like, "yes, hmm, I see." And a few minutes later I was like, "What? No."
Regardless, what the rule actually says is that companies have to have a policy on clawbacks and they have to keep track of when they use the policy. Hester would preferred: "streamlined, fully anonymized disclosure about amounts recouped, owed, and forgone." But she got overruled.
The SEC did "better" on removing the WORM requirement from 1997, which was 25 years ago. Until October firms were required to use write once, read many (WORM!) discs for storing records. You know, CD-ROMs. The things you don't have anymore. Hester did like this rule.
Crypto
There's wrangling over whether cryptocurrencies, tokens, NFTs, DAOs, staking pools, and other terms that are being invented as I write this, are securities or commodities. The SEC and CFTC each are staking out territory with various commissioners talking tough talk. (See my post on the SEC fine for Kim Kardashian, for example.)
My point is that nothing here is going to get resolved quickly. We've been using optical platters since Leonardo DiCaprio sank in the chilly Atlantic, and waiting for the clawback rules since "Hamilton" debuted on Broadway. And crypto is way more complicated and has a lot more interested and determined factions, including internationally.
In the meantime, blunt instruments like wire fraud, money laundering, and possibly racketeering <insert RICO Suave joke> are going to be the go to approach for the criminal prosecution side of things. My suggestion to anyone in crypto looking at your compliance and legal programs, is read up on those. (And maybe consider using semaphore.)
