Business
Column: The legal system is closing in on crypto, and things may only get worse
Forget what T.S. Eliot said about April. For the crypto community and its related scamsters, the cruelest month was March.
That month saw a string of jury verdicts and judicial rulings that laid bare the dark underside of cryptocurrency trading, reinforcing its reputation as a haven for fraud and other illegality. The terrain hasn’t proved any more inviting in April thus far, as regulatory investigations and judicial rulings continue to rock the asset class and its promoters back on their heels.
From the standpoint of ordinary investors and the economy as a whole, this is all good. As I’ve written before, the value of crypto tokens, from bitcoin down to the jokiest versions such as dogecoin, is so nebulous that they lend themselves to schemes aimed at separating unwary or gullible investors from their (real) money.
The ‘crypto’ nomenclature may be of recent vintage, but the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years.
— U.S. Judge Katherine Polk Failla
The value of cryptocurrencies can be placed anywhere. They don’t produce income like bonds, and their prices can’t be pegged to liquid markets like those of public company securities. To this day, no one has ever explained what cryptocurrencies are useful for, other than paying ransom to crooks holding databases or computer systems hostage.
As recently as Monday, Change Healthcare, a medical transactions processor owned by United Health Group, received a second demand for a ransom payable in crypto tokens only weeks after paying a reported $22-million ransom to rescue personal information, including payment data and medical records for thousands of patients.
That hack of Change’s database disrupted healthcare claims payments nationwide, even forcing some medical providers to lay off workers or shut down entirely for lack of funds.
The new demand apparently came from a ransomware group that feels it has been cheated by its partners in the first demand, who may have absconded with the original payoff. If there’s no honor among thieves, as the adage says, that goes double in crypto. No, not double — squared.
Let’s take a look at crypto’s March Madness before moving on to April.
The highest-profile blow, of course, was the March 28 sentencing of convicted crypto fraudster Sam Bankman-Fried for his conviction in October on seven fraud counts related to the collapse of his FTX crypto exchange.
Federal Judge Lewis Kaplan sentenced Bankman-Fried to a 25-year prison term and ordered him to forfeit more than $11 billion. Kaplan observed that Bankman-Fried had scarcely expressed remorse for his crimes. Kaplan justified the lengthy term by observing from the bench that otherwise Bankman-Fried would “be in a position to do something very bad in the future, and it’s not a trivial risk.”
That’s not all. The day before Bankman-Fried’s sentencing, federal Judge Katherine Polk Failla issued a ruling that may have a more far-reaching effect on the crypto business. Failla cleared the Securities and Exchange Commission to proceed with its lawsuit alleging that the giant crypto broker and exchange Coinbase has been dealing in securities without a license.
What’s important about Failla’s ruling is that she dismissed out of hand Coinbase’s argument, which is that cryptocurrencies are novel assets that don’t fall within the SEC’s jurisdiction — in short, they’re not “securities.”
Crypto promoters have been making the same argument in court and the halls of Congress, where they’re urging that the lawmakers craft an entirely new regulatory structure for crypto — preferably one less rigorous than the existing rules and regulations promulgated by the SEC and the Commodity Futures Trading Commission.
As it happens, Bankman-Fried made the same pitch in his appearances before congressional committees, back in the day when he was viewed as the last seemingly honest crypto promoter, before it was discovered that he had illegally appropriated his customers’ holdings to fund his and FTX’s own investment ventures.
Failla saw through that argument without breaking a sweat. “The ‘crypto’ nomenclature may be of recent vintage,” she wrote, “but the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years.”
Failla also took a swipe at the crypto gang’s amour-propre, rejecting Coinbase’s argument that the case should fall within the “major questions doctrine,” an informal rule that requires regulatory initiatives to be explicitly authorized by Congress if they involve issues of “vast economic and political significance.” Since Congress hasn’t enacted regulations specifically aimed at crypto, Coinbase said, the SEC’s lawsuit should be dismissed.
The judge’s opinion of that argument was withering. “While certainly sizable and important,” she wrote, “the cryptocurrency industry ‘falls far short of being a “portion of the American economy” bearing vast economic and political significance.’”
Crypto simply “cannot compare with those other industries the Supreme Court has found to trigger the major questions doctrine.” Those include the American energy industry and the conventional securities industry itself, she wrote.
Failla’s ruling followed another in New York federal court in which a judge deemed crypto to be securities.
In that case, Judge Edgardo Ramos refused to dismiss SEC charges against Gemini Trust Co., a crypto trading outfit run by Cameron and Tyler Winkelvoss, and the crypto lender Genesis Global Capital.
The SEC charged that a scheme in which Gemini pooled customers’ crypto assets and lent them to Genesis while promising the customers high interest returns is an unregistered security. The SEC case, like that against Coinbase, will proceed.
Both rulings tended to negate a 2023 ruling from federal Judge Analisa Torres of New York in an SEC enforcement action against Ripple, the developer of a crypto token known as XRP. Torres found that under some circumstances the token might not be a security. But her ruling is being buried by an onslaught of decisions by her colleagues that the crypto marketers and exchanges are dealing in unregistered securities, which is illegal.
The hangover from March continued into this month. On April 5, a federal jury in New York found Terraform Labs and its chief executive and major shareholder, Do Kwon, liable in what the SEC termed “a massive crypto fraud.”
The case involved Terraform’s so-called stablecoin UST, a crypto token that was pegged 1 to 1 with the U.S. dollar. Kwon was not in court to hear the verdict; he is in custody in the Balkan country of Montenegro while U.S. and South Korean authorities vie for his extradition.
Terraform had claimed that UST coin would automatically “self-heal” via a software algorithm if its value fell below the $1 peg. That happened in May 2021. When the coin did return to its $1 value, the SEC alleged, Terraform and Kwon bragged that the price restoration was a triumph over the “decision-making of human agents in a time of market volatility.”
In fact, the algorithm had nothing to do with it. According to testimony at the trial, which began in late March, Terraform was secretly bailed out by the trading firm Jump Trading, which may have invested tens of millions of dollars to prop up UST and emerged from the deal with a profit that may have exceeded $1 billion. Failing to disclose that arrangement to investors broke the law, the SEC said.
Kwon and Terraform also lied to the public that Chai, a South Korean financial firm akin to Venmo, was using Terraform to process transactions; in fact, Chai had ceased using Terraform in 2020, the SEC said.
These deceptions, the agency alleged, painted a picture of robust health within Terraform that came apart in May 2022, when UST again depegged from the U.S. dollar and could not be restored. The value of UST fell in effect to zero, the SEC said, “wiping out over $40 billion of total market value … and sending shock waves through the crypto asset community.”
Terraform is now bankrupt; no charges have been brought against Jump.
These events should give American lawmakers pause as they ponder what to do, if anything, about regulating crypto. At a hearing Tuesday of the Senate Committee on Banking, Housing, and Urban Affairs, Sen. Sherrod Brown (D-Ohio), the committee chairman, warned that crypto is a potential threat to national security.
“Bad actors — from North Korea to Russia to terrorist groups like Hamas — aren’t turning to crypto because they’ve seen the ads and bought the hype,” Brown said. “They’re using it because they know it’s a workaround. They know that it’s easier to move money in the shadows without safeguards, like know-your-customer rules or suspicious transaction reporting…. We must make sure that crypto platforms play by the same rules as other financial institutions.”
Brown’s words were amplified by Deputy Treasury Secretary Wally Adeyemo, who urged Congress to enact reforms the Treasury has proposed that would strengthen sanctions on “foreign digital asset providers that facilitate illicit finance.”
On Monday, meanwhile, Sen. Elizabeth Warren (D-Mass.) — perhaps the most uncompromising foe of crypto on Capitol Hill — took aim at stablecoins by urging the House Financial Services Committee to avoid trying to write rules that would “fold stablecoins deeper into the banking sector.”
Given the potential of stablecoins and their ilk to “undermine consumer protection and the safety and soundness of the banking system,” she warned, any so-called reforms “could amplify and entrench these risks rather than mitigate them.”
What is driving the interest of politicians in promoting an asset class that hasn’t shown any value except where fraud or theft is involved? As is so often the case, it’s money — the green, foldable kind.
Crypto promoters have been stepping up their lobbying in Washington; crypto firms spent nearly $20 million on lobbying in the first nine months of 2023, according to the watchdog group Open Secrets.
As a push for a new regulatory approach, especially among House Republicans, dovetails with an election year, much more spending would appear to be in the offing. It’s a win-win-lose situation, with politicians and crypto promoters poised to win, and ordinary investors as well as the economy as a whole poised to lose.
Business
Commentary: How right-wing anti-transgender attacks led to a Supreme Court ruling upholding sex discrimination
At the Supreme Court, the unfounded fear of boys masquerading as girls in youth sports rolled the clock back on gender equality.
On the surface, the Supreme Court’s June 30 opinion upholding state laws barring transgender girls from women’s and girl’s sports teams looks like a victory for women’s rights.
The 6-3 opinion by Justice Brett M. Kavanaugh certainly presents itself that way. “Females and males have inherent physical differences relevant to athletic performance,” Kavanaugh wrote. “Therefore, in contact sports, forcing female athletes to compete against males can create significant safety risks.” He also asserted that “forcing female athletes to compete against males can undermine competitive fairness.”
The ruling applied to prohibitions enacted in Idaho and West Virginia against “biological” males’ participation on women’s teams in public schools. Federal judges in both states overturned the bans. The Supreme Court majority restored them. The ruling essentially upholds similar bans enacted in 25 other states.
There was no record of any transgender person participating in school sports in the State, let alone any ‘problem’ with transgender students … creating unfair competition or unsafe conditions.
— Justice Sonia Sotomayor, demolishing the Supreme Court’s argument in favor of banning transgender girls from girl’s sports
Kavanaugh, like Donald Trump and others in the anti-transgender camp, maintained that one’s gender is an immutable fact of life, established even before birth.
Anything else, Trump stated in an executive order he issued on inauguration day 2025, could only be the product of “gender ideology extremism.” The U.S., his order stated, recognizes “two sexes, male and female. These sexes are not changeable and are grounded in fundamental and incontrovertible reality.” That’s a “biological truth,” he declared.
In his own version of this overconfident and factually insupportable conclusion, Kavanaugh wrote: “As all agree, females and males have inherent physical differences relevant to athletic performance.”
Science recognizes that some people are “born with sex traits that don’t fit into typical male or female patterns,” to cite a discussion on the Cleveland Clinic web page on the topic “intersex.” The condition “may involve chromosomes, hormones, reproductive organs or genitals.”
From a psychological standpoint, medical science recognizes “gender dysphoria” as a real condition often requiring counseling and medical intervention such as the use of puberty blockers and hormones to stave off the development of secondary sex characteristics until the condition can be resolved.
No one disputes that there are physical differences between the sexes. Few would dispute that on average or even at the median, males may be bigger and more powerful than females, or that in certain contact sports the difference may be telling and on occasion dangerous.
But that’s not the same as asserting that the physical differences between males and females invariably mean that men will invariably prevail over women in all competitions or that their participation will endanger women.
The International Olympic Committee — in a policy statement Kavanaugh cited incompletely — says that in “most running and swimming events,” males have a 10% to 12% advantage over women. That’s a range that would accommodate the full spectrum of outcomes — transgender females win, cisfemales win, they tie. (The “cis” prefix denotes those living consistent with their birth gender.)
West Virginia and Idaho addressed this ambiguity by banning transgender women from all girls’ teams. So under their rules transgender girls can’t play football or soccer with cisgirls. But what’s the argument in favor of banning them from the 100-yard dash, or cross-country track, or diving, or archery?
But something else is going on here. The Supreme Court’s ruling was almost preordained, given the years-long campaign by conservatives to demonize transgender individuals as if they’re members of an alien species.
It will be recalled that during his presidential campaign, Trump spun a despicable fantasy in which children were kidnapped in school and secretly subjected to sex-change operations.
Trump’s executive order wiped out policies aimed at protecting transgender adults from discrimination. He moved to outlaw gender-affirming medical therapies for anyone under 19 by cutting off federal funding for healthcare institutions that provide such care.
He banned transgender individuals from serving in the military and ordered federal prison officials to move transgender inmates into the general populations consistent with their birth genders, which exposes them to physical assault. (Federal Judge Royce Lamberth of Washington, D.C., has blocked the government from transferring three transgender women into the male prison population or terminating their hormone treatments.)
I wrote during Trump’s first term, when his anti-transgender policies were still gestating, that the goal was to show that “one can target any community, as long as it doesn’t have a strong political voice or political power. These are the actions of bullies and cowards, pretending to be strong.”
Last year, the Supreme Court struck its first blow against transgender rights by upholding a Tennessee law banning transgender care, including puberty blockers and hormone therapy, for minors. Similar laws have been enacted in 25 other states. The majority in that ruling by Chief Justice John G. Roberts Jr. was identical to the one in the June 30 ruling — Roberts, Kavanaugh, and Justices Clarence Thomas, Samuel A. Alito Jr., Neil M. Gorsuch and Amy Coney Barrett.
Who are the targets of this ideological campaign? They number only about 1.6 million U.S. adults, or one-half of 1% of the U.S. population. About 300,000 adolescents ages 13 to 17, or 1.4%, identify as transgender, according to a study by UCLA School of Law.
In West Virginia, as Justice Sonia Sotomayor observed in her dissenting opinion, “there was no record of any transgender person participating in school sports in the State, let along any ‘problem’ with transgender students … creating unfair competition or unsafe conditions.”
In endorsing the flat bans directed at transgender women in Idaho and West Virginia, Kavanaugh argued that any attempt to implement case-by-case judgments of students’ requests to join sports teams inconsistent with their biological gender would create “an enormous practical and administrability problem.”
Is that so? That wasn’t the case in Maine, where the annual K-12 population is more than 170,000. There, a committee was charged with determining whether a student’s participation in a sport consistent with their gender identity but inconsistent with their biological sex would “result in an unfair athletic advantage” or present a risk of injury to others. The committee held 56 hearings from 2013 through 2021, or an average of seven per year. During the entire time span, only four involved transgender girls. (The outcome of those hearings couldn’t be learned.)
It was Maine’s policy, one might recall, that provoked a confrontation between Trump and Maine Gov. Janet Mills at the White House last year, when Trump threatened to withhold federal funding from the state unless it barred transgender students from competing on women’s sports teams. “We’ll see you in court,” Mills snapped.
Whether the Idaho and West Virginia laws genuinely protect girls from unfair competition is questionable. (The Idaho law is styled the “Fairness in Women’s Sports Act.”) In practice, the laws may subject women in public schools to “invasive sex verification procedures,” as educational expert George Theoharis of Syracuse University wrote after the court ruling.
They’re also based on a retrograde view of women as fragile creatures needing men’s protection, Theoharis wrote — “the same logic that has historically been used to justify excluding women from making their own healthcare decisions and girls from rigorous math and science; that physically demanding work is simply beyond them.” (There don’t appear to be any state laws barring transgender women from competing in men’s sports.)
Becky Pepper-Jackson, the plaintiff in the West Virginia case, in which she is identified only as B.P.J., is the only transgender girl who sought to join girl’s teams — track and cross-country — in the state. That was in 2021, just after West Virginia passed its law and she was about to enter sixth grade. She didn’t appear to pose any competitive risk to others on the track and cross-country teams she applied to join — her lawyers told the Supreme Court that on those no-cut teams, she “came in near the back.”
Anyway, she had not gone through male puberty, which theoretically might have endowed her with a competitive advantage, because she had been taking puberty blockers and female hormones.
Thanks to the court’s ruling, Sotomayor observed in a dissent joined by Justices Elena Kagan and Ketanji Brown Jackson, West Virginia can deny Becky access to school sports “because it thinks they have an inherent athletic advantage, even if the facts show that they do not.”
B.P.J., Sotomayor wrote, “cannot practice on girls’ teams, even if she would not take anyone’s spot in an eventual competition, even if everyone who tries out for the team makes it, and even if having the chance to participate could aid immensely in treating B. P. J.’s gender dysphoria.”
So whose interest was really protected by the Supreme Court?
Business
Orange County real estate investor pleads not guilty in $100 million bank fraud case
An Orange County real estate investor accused of criminally defrauding an Arizona bank of nearly $100 million pleaded not guilty Monday and remains in custody.
Mahender Makhijani, 44, of Corona del Mar — who also was ordered by an arbitrator to pay $1.34 billion in a separate civil fraud case — was arraigned in Santa Ana federal court on two charges.
He is accused of bank fraud and making a false statement to a bank in a June 8 case involving a $100 million real estate loan made by Phoenix-based Western Alliance Bank. He was taken into custody on June 10.
Makhijani is accused of providing bogus collateral for the October 2024 loan now in default. In a civil lawsuit, Western Alliance said the outstanding balance as nearly $99 million.
Prosecutors say he falsified title insurance policies that showed the bank would have a first lien on the underlying collateral if the loan went bad, when in fact it did not.
A trial was set for August 11 before U.S. District Judge David O. Carter in Santa Ana.
Michael Schachter, his criminal defense attorney, did not respond to messages seeking comment.
In the civil case, an arbitrator in May ordered Makhijani to pay Laguna Beach real estate mogul Mohammad Honarkar $1.34 billion after ruling he had fraudulently induced him into a 2021 joint venture — and then wrested control and lost to creditors more than two dozen properties Honarkar had owned.
Makhijani has not been criminally charged in that case, but prosecutors alleged in an affidavit in support of the bank fraud charges that he used “force and threats” in his dealings with Honarkar and others — including taking over the landmark Hotel Laguna in 2023 that Honarkar was renovating.
Prosecutors sought to hold Makhijani without bail after his arrest.
The affidavit noted he is a legal Indian immigrant with a home and bank accounts in that country, has access to private jets and threatened to “run away” if caught in a difficult situation.
The request was denied and he was granted $500,000 bail.
However, Makhijani remains in custody after a hearing sought by prosecutors last month before Magistrate Judge Autumn Spaeth.
The judge declined to accept a $450,000 cashier’s check submitted by a Makhijani associate for the bail, finding insufficient proof the source of the funds was legitimate, according to court records.
Makhijani is not prominent outside Orange County real estate circles, but he established a thriving distressed-assets business over the last decade that attracted prominent Southern California real estate investors.
Prosecutors said it paid for a lifestyle that included two multimillion-dollar homes in Corona del Mar, a luxury apartment in Newport Beach and various luxury vehicles.
As of last month, prosecutors had not fully traced his assets, which they believe are not held in his name and some of which may be in India.
The businessman employed an array of shell companies and strawmen to sign documents on his behalf, and to stand in for him as operators of his companies, according to the affidavit.
Makhijani told an associate he took extra precautions because wanted to insulate himself from litigation and that “they were sharks in the distressed world who took advantage of people,” the affidavit stated.
Business
Many indie festival films struggle to get distribution. Alamo Drafthouse is trying to change that
Dine-in movie theater chain Alamo Drafthouse Cinema is launching a new initiative to show unreleased independent films that had successful festival runs, a move that comes as specialty films have struggled to gain distribution.
The Alamo Exclusives program, announced Wednesday, will give limited theatrical runs to films that showed at festivals including Sundance, the Toronto International Film Festival, Tribeca Festival and South by Southwest festival, as well as Alamo’s own Fantastic Fest.
The idea is to help showcase films that received critical acclaim, but did not secure distribution or acquisition deals. The chain will not acquire these films, but instead will enter into agreements with filmmakers to exhibit their films on Alamo Drafthouse screens. By showing these films to audiences on the big screen, these films could get the momentum they need for further opportunities.
The program’s first film will be the documentary “Butthole Surfers: The Hole Truth and Nothing Butt,” which debuted last year at South by Southwest and chronicles the history of the punk rock band.
The film will be shown in Alamo Drafthouse theaters for a limited time later this summer.
The Austin-based chain, which is owned by Sony Pictures, has a long history of curating indie films for its audiences, giving Alamo Drafthouse confidence that its viewers want to see these kinds of movies, company chief executive Michael Kustermann said in a statement.
“Time and again, they’ve shown they’ll come out to support bold, original films when given the opportunity,” he said. The new Alamo Exclusives “gives us another way to champion filmmaker-driven films that deserve to be discovered and connect them with the wider Alamo Drafthouse audience.”
The initiative comes at a difficult time for indie films. Since the pandemic upended the movie business, traditional studios and distributors have had less appetite for risk, including betting on smaller indie films out of festivals.
And as the 2023 dual writers’ and actors’ strikes thinned out theatrical lineups, that aversion to uncertainty became a push for reliable and profitable hits.
“Too many incredible films premiere at festivals and then never receive the theatrical life they deserve,” Lisa Dreyer, director of Fantastic Fest and film innovation at Alamo, said in a statement. “We are actively searching for films across all genres, from horror to comedy, to everything in-between, to champion in this new, exciting way.”
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