Judge Keeps CZ in U.S. Pending Review

As we noted two days ago in Will Congress Finally Do Its Job?, the operator of the world’s largest cryptocurrency exchange, Binance,  pleaded guilty and agreed to pay $4.3 billion to resolve the Justice Department’s investigation into violations related to the Bank Secrecy Act, failure to register as a money transmitting business, and the International Emergency Economic Powers Act. Additionally, Binance’s founder and CEO, Changpeng “CZ” Zhao also pleaded guilty to failing to maintain an effective anti-money laundering (AML) program, resigned as CEO of Binance and personally paid a $50 million fine to the Commodity Futures Trade Commission (CFTC) for “intentionally sabotaging and subverting Binance’s superficial compliance controls, including controls designed to restrict the participation of U.S. persons”.

As part of that agreement, Magistrate Judge Brian A. Tsuchida tentatively permitted CZ to return to the United Arab Emirates pending sentencing based on his $175 million appearance bond (though as a practical matter, it was secured by two guarantors with cash pledges totalling $350,000 plus a third guarantor with real property located in Los Angeles valued at more than $5 million, while CZ wired $15 million, which is being held in his Seattle-based attorney’s trust account). However, Judge Tsuchida gave the government until 5:00 p.m. today to seek review of the release order.

Prosecutors filed on November 24 a reply arguing that CZ is a flight risk and should thus remain in the U.S. until sentencing on February 23, 2024:

In the vast majority of cases, a multi-billionaire defendant who has pleaded guilty, faces possible prison time, and lives in a country that does not extradite its citizens to the United States would be detained. But this is an unusual case. Changpeng Zhao has voluntarily appeared in the U.S. to face justice. At the bond hearing, the United States took that into account and made an exceptional recommendation: that Mr. Zhao be allowed to remain free until his sentencing. The United States did not make that recommendation because it believed that Mr. Zhao presented no flight risk. Rather, the United States believed that Mr. Zhao presented a flight risk that could be managed by requiring him to remain in the U.S. and preventing him from returning to the safe haven of the UAE until sentencing. This is a reasonable restriction given that, if Mr. Zhao is allowed to return to the UAE and then fails to appear, he may never answer for his crime.

They added that CZ “has no ties to the U.S.”, given that his family lives in the UAE and is wealth is held there and elsewhere outside the U.S. and that since he obtained UAE citizenship by invitation “should Mr. Zhao decide not to return to the United States to face an uncertain sentence, there is no reason to believe that the UAE would hand him over”.

Today, Judge Richard A. Jones of the U.S. District Court for the Western District of Washington issued a stay, writing, “Having considered the briefing, and the files and pleadings herein, the Court determines it will review the decision of Magistrate Judge Brian A. Tsuchida permitting Defendant to return to the United Arab Emirates pending sentencing pursuant to the conditions of his appearance bond.”

The defense motion filed on November 24 made the follow points in arguing for permitting CZ to travel to the UAE and return for the February sentencing:

• “Judge Tsuchida found that Mr. Zhao presents no risk of flight, even while residing in the UAE”
• “Agreeing to pay collectively billions of dollars to multiple U.S. government agencies, his intent is to resolve this case and it would be illogical to take all of these material steps without the intent to appear for sentencing”
• Having founded the world’s largest crypto platform by volume “makes evasion of the U.S. justice system impossible. He has pleaded guilty to a crime which—though serious, as Mr. Zhao has acknowledged—has nothing to do with violence or fraud; there are no victims and there will be no restitution”

But that last point is disputed by the Securities Exchange Commission, which filed 13 charges against Binance and CZ in June, stating:

Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law. As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied. They attempted to evade U.S. securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value U.S. customers on their platforms.

There has been evidence of this for years, including all the way back in 2020 when crypto journalist Micheal del Castillo obtained a Binance presentation outlining a plan to pretend to be compliant while inviting large customers to go around the controls:

The leaked Tai Chi document, a slideshow believed to have been seen by senior Binance executives, is a strategic plan to execute a bait and switch. While the then-unnamed entity set up operations in the United States to distract regulators with feigned interest in compliance, measures would be put in place to move revenue in the form of licensing fees and more to the parent company, Binance. All the while, potential customers would be taught how to evade geographic restrictions while technological work-arounds were put in place.

And the Wall Street Journal reported today that, “The Securities and Exchange Commission is still looking for evidence that Binance and its founder Changpeng Zhao may have a backdoor to control assets stored on the Binance.US platform” – as did FTX at the direction of  Sam Bankman-Fried, who was convicted earlier this month after a headline-making trial resulting in only four hours of jury deliberation.

As for how CZ is taking all this, he tweeted on Thanksgiving that he’s been reading Ryan Holiday and people are noting that his “mental strength and stoicity is just crazy nuts”.