Latest / Bloomberg Law / SBF Cooperator Gets No Prison & New Crypto Strategy

Transcript

SBF Cooperator Gets No Prison & New Crypto Strategy · Bloomberg Law

0:03
Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio.
0:10
Speaker 2: He's the first person charged in the FTX collapse to
0:14
Speaker 2: avoid prison. Former FTX chief engineer Nishad Singh was one
0:19
Speaker 2: of three top executives who turned on Sam Bankman Freed
0:23
Speaker 2: and testified against him after his once thriving crypto empire
0:28
Speaker 2: imploded in twenty twenty two. Bankman Freed is serving a
0:32
Speaker 2: twenty five year prison sentence after a jury found him
0:35
Speaker 2: guilty of fraud last year. Alameda Research chief executive officer
0:40
Speaker 2: Caroline Ellison, the star witness against Bankman Freed, is reporting
0:45
Speaker 2: to prison in September to serve a two year sentence.
0:49
Speaker 2: Ryan Salome, one of Bankman Freed's top lieutenants at FTX
0:53
Speaker 2: who did not testify against him, is serving a seven
0:57
Speaker 2: and a half year sentence. But Singh walked out of
1:00
Speaker 2: the courtroom yesterday. A free man joining me is Bloomberg
1:04
Speaker 2: Legal reporter Ava Benny Morrison, who covered the trial and
1:08
Speaker 2: was at the sentencing, tell us a little about Singh.
1:11
Speaker 3: Mshad sing was one of three top executives at FTX
1:15
Speaker 3: who turned on Sam Banks and Freed and signed up
1:18
Speaker 3: his corporating witnesses to the government. They all testified at
1:21
Speaker 3: stmin Fred's broad trial and eventually helped land his conviction
1:26
Speaker 3: to statement. Freed's currently serving twenty five years in jail,
1:30
Speaker 3: and after his sentence, it was time for the corporators
1:33
Speaker 3: to face their own punishment for their role in the
1:35
Speaker 3: collapse and the years long thought at FTX. Now Mishad
1:39
Speaker 3: Singh turned up in court yesterday and we heard some
1:42
Speaker 3: pretty compelling arguments from his attorney about why he should
1:46
Speaker 3: avoid spending a day in prison. Only a couple of
1:50
Speaker 3: months ago, Caroline Elison, the former CEO of Alimenta Research,
1:54
Speaker 3: was sentenced to.
1:55
Speaker 4: Two years in jail.
1:57
Speaker 3: This is unusual most corporators end up avoiding any jail
2:01
Speaker 3: time whatsoever, but fortunately for Nishad scene that was what happened.
2:05
Speaker 3: Judge Lewis Caplan found that he deserved more cooperation credit
2:08
Speaker 3: than Caroline Ellison, and he was essentially less culpable than
2:12
Speaker 3: the florid at FTX than Allison was.
2:14
Speaker 2: It also that he was involved in the fraud for
2:17
Speaker 2: a shorter period of time.
2:19
Speaker 3: Judge Kaplan certainly seemed to focus on the amount of
2:23
Speaker 3: time Mishading knew about the fraud, so Nishad who was
2:27
Speaker 3: the chief engineer at FTX, only found out in September
2:31
Speaker 3: of twenty twenty two that FTX had been sending customer
2:36
Speaker 3: funds billions at dollars worth of customer fund to alimated research.
2:39
Speaker 3: In contrast, Caroline Ellison knew about this for years and
2:44
Speaker 3: was an accomplice to Sam Bankman. Fridge and Caplan found
2:48
Speaker 3: that this certainly helped Mishad Thing's case, the fact that
2:51
Speaker 3: he only knew about it for a couple of months
2:53
Speaker 3: before STX collapsed. You know, both the prosecution and the
2:56
Speaker 3: defense did admit even when Nishad Thing found out about this,
3:00
Speaker 3: max is broad and that STX couldn't afford to cover
3:03
Speaker 3: the whole customer deposits. He continued to allow campaign donations
3:07
Speaker 3: to be made in his name and forged ahead with
3:10
Speaker 3: a purchase of a beautiful house in Washington State, something
3:15
Speaker 3: that his lawyer said he will forever be ashamed of.
3:17
Speaker 5: Three point seven million dollar house.
3:20
Speaker 3: Yes, that's right, it was worth three point seven million
3:23
Speaker 3: dollars and he bought it with his friends with a
3:26
Speaker 3: place to go and when he could relax and go
3:28
Speaker 3: on holidays. This was kind of the only luxury. Maybe
3:32
Speaker 3: indulging purchase that Mishad seen had May when he was STX.
3:36
Speaker 3: His lawyers, you know, really stressed that he was a
3:38
Speaker 3: true believer in effect of altruism, his philosophy that drew
3:42
Speaker 3: a lot of the STX and LM research folks together,
3:45
Speaker 3: this idea that you could earn a lot of money
3:47
Speaker 3: and give most of your way to make the world
3:49
Speaker 3: better place. Mishad was very interested in charity. You know,
3:52
Speaker 3: he's been involved in given away a lot of concernings
3:55
Speaker 3: since he was in college. And his lawyers really tried
3:59
Speaker 3: to push that point that this was, you know, yeah,
4:02
Speaker 3: a big purchase, but it didn't look like he's and he's.
4:05
Speaker 2: Been working all this time, unlike Caroline Ellison.
4:08
Speaker 3: In Caroline Ellison's case, her lawyers have said that she
4:12
Speaker 3: was really struggling to find an employment after the SPX collapse,
4:18
Speaker 3: mainly because of the reputational damage that came is being
4:21
Speaker 3: associated with STX and Elemental Research. She had been working
4:27
Speaker 3: on writing a non fiction book and a math book
4:30
Speaker 3: that Mischadsen had been lucky enough to find a job.
4:34
Speaker 3: He's been working as a software engineer for a firm
4:37
Speaker 3: in California since FTX collapsed, and he's also been volunteering
4:41
Speaker 3: at a homeless shelter up from his house in the
4:44
Speaker 3: Bay Area, and at night he's working on code for
4:48
Speaker 3: a affordable housing project. So this certainly went towards his
4:53
Speaker 3: argument for someone that is trying to build his life
4:56
Speaker 3: back up again, and you know, he's certainly just any
5:00
Speaker 3: interest in getting involved in a multi billion dollar thought again.
5:04
Speaker 2: When he spoke to the judge, how did it come across.
5:08
Speaker 3: Something that struck me about Mishad in court yesterday was
5:11
Speaker 3: that he remained very calm and very composed the entire time.
5:15
Speaker 3: When he got up to speak to Judge Caplan, he
5:18
Speaker 3: approached the lectern with a piece of paper with his
5:21
Speaker 3: written words on it in his hand and said that
5:23
Speaker 3: how remorseful he was and how gutted he was about
5:27
Speaker 3: the harm that he caused to so many innocent people.
5:31
Speaker 3: He spoke about, you know, wanting to prove to not
5:33
Speaker 3: only the judge but others that he was on the
5:36
Speaker 3: past to redemption and he wanted to do good and
5:40
Speaker 3: be a force for good in the world since being
5:42
Speaker 3: part of the calamity at SS And what.
5:45
Speaker 2: Was the reaction when he learned that he wasn't going
5:48
Speaker 2: to have to go to prison.
5:49
Speaker 3: I think that the big question mark was whether Judge
5:53
Speaker 3: Caplan was going to send Mishad's prison or save him
5:57
Speaker 3: from that, especially after the two years Tent said he
5:59
Speaker 3: had the Caroline Elephent. So when he got to the
6:03
Speaker 3: pointy end of delivering his judgment, Mi Shad was standing
6:07
Speaker 3: between his two lawyers, and Judge Kaplin said I order
6:11
Speaker 3: you to report to the Attorney General of the United
6:14
Speaker 3: States the time served. And at that point Shad sing
6:17
Speaker 3: barely reacted. There was a very saint smile that came
6:21
Speaker 3: across his face. While his family, of which there were many,
6:25
Speaker 3: seated in the public gallery behind him, Augar his Beyonce
6:29
Speaker 3: Claire put her hand over her mouth. His mother kissed
6:33
Speaker 3: his Beyonce on the cheek, and they held hands and
6:36
Speaker 3: you could see that how emotional that they were. They
6:38
Speaker 3: were crying, but you could just sense the kind of
6:41
Speaker 3: utter relief that was put across the court room.
6:44
Speaker 2: What seemed a little unusual is that the judge addressed
6:47
Speaker 2: Thing's parents and said, I don't see anything you did wrong.
6:52
Speaker 2: Tell us what led to that.
6:54
Speaker 3: That's right part of things. Sentencing his parents along with
6:58
Speaker 3: his brother and other friends and former colleagues that FTX
7:01
Speaker 3: permitted letters in support of him, and his parents' letters
7:06
Speaker 3: were pretty heartbreaking. They spoke about raising their son as
7:10
Speaker 3: best as they could, spoke about how intelligent and talented
7:13
Speaker 3: he was, and then discovering that he had been caught
7:15
Speaker 3: up and export at FTX, And there were some pretty
7:18
Speaker 3: harrowing parts in there about the impact that the FTX
7:21
Speaker 3: collapse had had on the Shad and how he had
7:23
Speaker 3: contemplated suicide in the weeks and months after FTX. His
7:27
Speaker 3: parents spoke about the impact on his mental health, and
7:30
Speaker 3: the Shad lawyer actually made a point of saying, you know,
7:34
Speaker 3: every time Shad flew over from California to New York
7:37
Speaker 3: to meet with us at our offices, his father was
7:40
Speaker 3: there in the conference room sitting across from him, or
7:42
Speaker 3: his younger brother was there. So he had the unwavering
7:45
Speaker 3: support of his family. And that was very clear from
7:48
Speaker 3: the amount of people that turned up in the court yesterday.
7:50
Speaker 3: And the judge addressed that at the end of his sentence,
7:53
Speaker 3: after he told the Shad that he wouldn't have to
7:55
Speaker 3: serve danja Ol, and he said, you know, I'd like
7:58
Speaker 3: to just address this Thing's parents on a personal note,
8:01
Speaker 3: and he said, there is nothing I can see that
8:03
Speaker 3: you did wrong, and then he walked out of the courtroom.
8:05
Speaker 3: And I think it was quite an emotional moment in
8:08
Speaker 3: the courtroom, especially if Mishad's parents to see that. They
8:12
Speaker 3: were I think quite receptive to what he said and
8:15
Speaker 3: almost grateful because you can imagine the impact he's had
8:19
Speaker 3: on his family.
8:20
Speaker 5: So this case is over. What's the next sentencing?
8:23
Speaker 2: Is that this final sentencing in this case.
8:27
Speaker 3: Yes, we've got one final sentencing hearing left in this
8:31
Speaker 3: FTX saga, and that is of Gary Wong. Gary Wong
8:35
Speaker 3: was the co founder at STX. He helped build the
8:37
Speaker 3: exchange with Sam Bank mcfreed. He became the chief technology officer,
8:42
Speaker 3: and he was also a corporating witness and gay testimony
8:46
Speaker 3: at Sam's trial. He's due to be sentenced at the
8:49
Speaker 3: end of November, so it'll be interesting to see where
8:52
Speaker 3: Judge Kaplan puts him on the culpability scale because he
8:57
Speaker 3: knew about the afforded STX and animator research a little
9:03
Speaker 3: bit earlier than Michez Thing did. Thought from the evidence
9:07
Speaker 3: that we heard it call, he wasn't as safely involved
9:10
Speaker 3: as Camlin.
9:11
Speaker 2: Elision was and of course we should mention that Sam
9:14
Speaker 2: Bankman freed is appealing his conviction. Thanks so much, Ava.
9:19
Speaker 2: That's Bloomberg Legal reporter Ava. Benny Morrison coming up next
9:22
Speaker 2: on the Bloomberg Law Show. The crypto industry is using
9:26
Speaker 2: a Texas legal strategy to dial up its attacks on
9:30
Speaker 2: the SEC. A leading crypto trading platform is trying a
9:35
Speaker 2: preemptive strike against the SEC. Crypto dot Com is suing
9:40
Speaker 2: the SEC before the agency has a chance to bring
9:44
Speaker 2: an enforcement action against it. And it's suing in the
9:47
Speaker 2: strategic venue of Texas, home of the Fifth Circuit, the
9:51
Speaker 2: most conservative appellate court in the country, which has restricted
9:54
Speaker 2: agency powers, including in the Jocracy case which led to
9:59
Speaker 2: a Supreme Court decision last year limiting the SEC's use
10:03
Speaker 2: of in house judges. Joining me is securities law expert
10:07
Speaker 2: James Park, a professor at UCL Law School. Crypto dot
10:11
Speaker 2: Com got a Wells Notice indicating the SEC was going
10:15
Speaker 2: to bring an enforcement action, and instead of waiting, it
10:19
Speaker 2: beat the SEC to the pun so to speak.
10:22
Speaker 1: It did and that's unusual. You know. Wells notice is
10:26
Speaker 1: an indication by the SEC that it's panning to bring
10:30
Speaker 1: a case, and the purpose of the Wells notice, which
10:33
Speaker 1: has been around since the nineteen seventies, is to give
10:36
Speaker 1: the potential defendant a chance to provide evidence or arguments
10:41
Speaker 1: to the SDC persuading it not to bring a case.
10:44
Speaker 1: And so this is unusual in that a typical response
10:48
Speaker 1: to a Wells Notice would be to make a final
10:52
Speaker 1: attempt to persuade the SEC not to bring a case,
10:55
Speaker 1: and instead Crypto has preemptively sued the SDC in the
11:01
Speaker 1: Eastern District of Texas and basically argue that it is
11:05
Speaker 1: overreaching its jurisdiction even though the SEC is not actually
11:10
Speaker 1: voted to bring the case.
11:12
Speaker 2: So is the case ripe then for decision if they
11:16
Speaker 2: don't know exactly what the SEC would be doing.
11:20
Speaker 1: That's the argument I think the SEC is going to make.
11:24
Speaker 1: They will argue that we have not decided to sue
11:26
Speaker 1: you at this particular point in time, and so there's
11:29
Speaker 1: not a ripe dispute that can really be adjudicated in
11:33
Speaker 1: this case. I think Crypto dot Com will argue though,
11:38
Speaker 1: that well, you know, we know you're going to bring
11:41
Speaker 1: enforcement against us. We know the theory because it's been
11:44
Speaker 1: asserted against other crypto exchanges. And therefore we should be
11:49
Speaker 1: permitted to challenge your policy, your administrative actions, and we
11:56
Speaker 1: might have standing because we could be injured or affected
12:00
Speaker 1: by that particular decision. But I think that'll be a
12:03
Speaker 1: critical issue for the district court to consider whether this
12:06
Speaker 1: is indeed a right dispute.
12:08
Speaker 2: Crypto dot Com, which is based in Singapore, last year
12:12
Speaker 2: moved at US headquarters from Miami to Tyler, Texas. Does
12:18
Speaker 2: it seem like that's a move to a friendlier jurisdiction.
12:22
Speaker 1: It could be for a variety of reasons, not necessarily
12:27
Speaker 1: related to this lawsuit, but simply the lack of a
12:31
Speaker 1: state income tax generally a business friendly climate. I would
12:37
Speaker 1: be surprised sort of the ability to file in a
12:41
Speaker 1: particular jurisdiction is what may have motivated Crypto dot com.
12:45
Speaker 1: And you know, I think there are a lot of
12:47
Speaker 1: considerations that go into play when you are moving your
12:51
Speaker 1: headquarters from one place to another, But certainly the fact
12:55
Speaker 1: that it is in Texas now it's more of a
12:58
Speaker 1: natural place for the like this to be filed as
13:01
Speaker 1: opposed if they were in Miami and filing in Texas,
13:04
Speaker 1: it'd be more of an attenuated link between Crypto dot
13:07
Speaker 1: Com and Texas if its headquarters was not located. Now,
13:10
Speaker 1: certainly they have customers in Texas, they do business in Texas,
13:14
Speaker 1: and so they could argue they should still be able
13:16
Speaker 1: to see in Texas. But the fact that they are
13:18
Speaker 1: headquarters there may make the arguments that the case should
13:21
Speaker 1: be in Texas a little bit stronger.
13:24
Speaker 2: Any case in Texas that's appealed would be appealed to
13:27
Speaker 2: the Fifth Circuit, which is notoriously conservative and has struck
13:32
Speaker 2: down a slough of Biden regulations.
13:36
Speaker 1: It hasn't particularly with respect to SEC regulations. They are
13:41
Speaker 1: struck down very extensive, ambitious regulations of hedge funds private
13:47
Speaker 1: funds that would have required disclosure relating to fees, and
13:53
Speaker 1: they have struck down disclosure rules were leading to stock
13:57
Speaker 1: repurchases by companies. They basically said, the SEC arbitrarily changed
14:03
Speaker 1: its position on a proxy advisory firms and the advice
14:09
Speaker 1: they give with respect to voting. One exception, though, with
14:12
Speaker 1: respect to the Fifth Circuit, is that initially they upheld
14:17
Speaker 1: various rules relating to diversity and diversity disclosure passed by
14:21
Speaker 1: the Nasdaq, which is a regulated exchange that is regulated
14:25
Speaker 1: by the SEC, and past various rules saying that if
14:28
Speaker 1: you don't have a certain diversity on your board, you
14:31
Speaker 1: have to issue disclosure a panel that this circuit initially
14:35
Speaker 1: upheld that decision, but the entire Fifth Circuit unboked. The
14:40
Speaker 1: entire court decided to review that decision, and reports of
14:45
Speaker 1: the argument indicate that they may strike down that rule
14:48
Speaker 1: as well. So the answer is yes, so that the
14:51
Speaker 1: Fifth Circuit generally has not been a favorable court for
14:56
Speaker 1: the SEC.
14:57
Speaker 2: If the SEC brings in action, would it be brought
15:00
Speaker 2: in the second Circuit?
15:02
Speaker 1: It depends. I think it depends on the circumstances. And
15:06
Speaker 1: they have sort of a wide amount of discretion. Is
15:08
Speaker 1: where they can file a suit. And you know, wherever
15:12
Speaker 1: there are investors who have been harmed by a particular
15:16
Speaker 1: practice and so forth, that they might choose to sue
15:19
Speaker 1: in that venue. But you know, they could have chosen Texas.
15:23
Speaker 1: You know, the SEC might have simply said, your headquarters
15:25
Speaker 1: in Texas will sue you in Texas. They might have
15:28
Speaker 1: suit in Washington, DC. That's another place where they can
15:31
Speaker 1: bring suit, and they often bring suit in the Southern
15:34
Speaker 1: District of New York. There's a common venues and there's
15:37
Speaker 1: a lot that goes into I think choosing a venue
15:40
Speaker 1: there's no real science to it, And I think they
15:43
Speaker 1: actually still could sue Crypto dot Com in another jurisdiction,
15:48
Speaker 1: in another venue if they chose to bring a case
15:50
Speaker 1: against Crypto. I don't think there's anything about this particular
15:54
Speaker 1: case that precludes them from suing Crypto independently in the
15:58
Speaker 1: enforcement action that they might have been planning to bring.
16:01
Speaker 1: And then you could have concurrent lawsuits where you could
16:04
Speaker 1: have this proceeding in Texas at the same time as
16:07
Speaker 1: a SEC enforcement case against Crypto and Washington DC, and
16:12
Speaker 1: that poses a certain complication, which might be you know,
16:15
Speaker 1: an argument for dismissing one of the cases on ripe
16:18
Speaker 1: this grounds is that it may not be a good
16:20
Speaker 1: thing to have two concurrent lawsuits against the same defendants
16:24
Speaker 1: that are basically deciding the same issue.
16:27
Speaker 2: So is Crypto dot COM's lawsuit about the SEC's power
16:32
Speaker 2: about agency power?
16:34
Speaker 1: That's certainly part of it. It is a broader question,
16:36
Speaker 1: and they're they're interrelating, right, it's sort of you know,
16:40
Speaker 1: I'm questioning your agency power, your jurisdiction that could be
16:45
Speaker 1: asserted against US. And if the SEC brought a case
16:49
Speaker 1: against Crypto, the assumption is that the SEC has jurisdiction
16:53
Speaker 1: and power, it would be just more of a background issue.
16:56
Speaker 1: Both cases, I think would raise the same basic issue,
17:01
Speaker 1: but you know, the one in Texas, I think is
17:04
Speaker 1: much more hypothetical and it's much more of a hypothetical
17:08
Speaker 1: injury to Crypto dot Com. Whereas if the SEC sues
17:13
Speaker 1: Crypto dot Com, then Crypto has a very clear basis
17:18
Speaker 1: for saying that we have been injured by the SEC's
17:21
Speaker 1: action and the SEC does not have authority, and so
17:25
Speaker 1: there's an argument that it might be better to decide
17:28
Speaker 1: that issue in that concrete setting where the SEC has
17:32
Speaker 1: asserted it's jurisdiction under Crypto, rather than hypothetically wondering whether
17:37
Speaker 1: the SEC does have jurisdiction over Crypto.
17:41
Speaker 2: We've talked before about how Crypto has been fighting the
17:46
Speaker 2: SEC in different ways. Is this affirmative litigation part of
17:51
Speaker 2: a broader strategy.
17:53
Speaker 1: It's a good question as to whether there's any coordination. No,
17:58
Speaker 1: is there a crypto industry that is essentially strategize That's
18:03
Speaker 1: something I just don't know, but you know, certainly these
18:07
Speaker 1: arguments are out there, and they've been developed in earlier
18:11
Speaker 1: cases by by Ripple by binance by coinbase, and I
18:16
Speaker 1: think crypto dot Com and its attorneys and I've learned
18:21
Speaker 1: from those arguments, and I think that they are trying
18:25
Speaker 1: to open up another front in the battle. And perhaps
18:29
Speaker 1: their belief is that, you know, if you can get
18:32
Speaker 1: a favorable decision from a Texas court, a fifth Circuit court,
18:37
Speaker 1: that that might help our cause in some way with
18:41
Speaker 1: other appellate judges or the US Supreme Court. And so
18:45
Speaker 1: I think that you know, even if there is not
18:47
Speaker 1: coordination among various members of the industry, there is just
18:53
Speaker 1: a concerted industry argument that is being asserted in different
18:58
Speaker 1: venues and in jurisdiction that you know, may ultimately be
19:03
Speaker 1: decided by the US Supreme Court. And having a variety
19:07
Speaker 1: of judges weigh in could be helpful to the crypto
19:10
Speaker 1: industry if you're getting more favorable ruling that are skeptical
19:15
Speaker 1: of the SEC's jurisdiction of a crypto asset. Now, there's
19:19
Speaker 1: also a risk though to a strategy where you're bringing
19:22
Speaker 1: multiple cases, is that some of those cases may go
19:25
Speaker 1: against you and so forth. You know, I also think
19:28
Speaker 1: there's a pr aspect to this as well, where you know,
19:31
Speaker 1: we're filing a high profile action against the SEC. Let's
19:35
Speaker 1: create this narrative that you know, the SEC is abusing
19:39
Speaker 1: its authority and that a lot of folks are angry
19:42
Speaker 1: about them. Are you know? Basically it's coming up again
19:46
Speaker 1: and again, right, I think you know that coinbase and
19:49
Speaker 1: binance cases are not really in the news as much.
19:52
Speaker 1: So hey, let's let's bring this preemptive action and keep
19:56
Speaker 1: this in the public discourse to put pressure on the SEC.
20:00
Speaker 1: So to keep the issue alive as we lobby for
20:04
Speaker 1: more favorable regulation.
20:05
Speaker 2: We're certainly paying attention to it. So in September, a
20:09
Speaker 2: judge in Texas dismissed a case brought by a crypto company,
20:13
Speaker 2: and he found that wells notice and subsequent suit from
20:17
Speaker 2: the SEC weren't final actions and that the case was
20:21
Speaker 2: therefore premature. But this is being a sign to Judge
20:25
Speaker 2: Jeremy Kernadel, who ruled in July to freeze rulemaking by
20:29
Speaker 2: the Labor Department. I mean he wouldn't have to follow
20:33
Speaker 2: the other judge's determination.
20:35
Speaker 1: Right, That's true. It's not binding. It's a district court decision,
20:38
Speaker 1: so it's not binding on another district court. The reason
20:42
Speaker 1: could be influential though, and it's certainly something I'm sure
20:46
Speaker 1: that the judge will look at very closely. You know,
20:49
Speaker 1: there may be some differences between Crypto dot COM's case
20:53
Speaker 1: and the prior case, and you know, I read something
20:57
Speaker 1: very quickly about that prior case by I can consent,
21:00
Speaker 1: and I think in that case it was very clear
21:03
Speaker 1: at some point that the SEC would not bring an action,
21:06
Speaker 1: and so maybe that's the way you would distinguish the
21:09
Speaker 1: Crypto dot Com case in that I'm fairly certain that
21:13
Speaker 1: the SEC will bring an action against Crypto dot Com.
21:16
Speaker 1: It's a very similar fact pattern as Binance and coinbase,
21:21
Speaker 1: and so Crypto dot Com will say, sure, they haven't
21:24
Speaker 1: decided to bring a suit against that, but given our
21:27
Speaker 1: knowledge of their past enforcement activity, it's very unlikely that
21:31
Speaker 1: they will not. I think that's the argument Crypto dot
21:34
Speaker 1: Com might try to make.
21:36
Speaker 2: What do you think of Crypto dot COM's tactic in general?
21:40
Speaker 1: You know, it's a very interesting move to preemptively sue
21:45
Speaker 1: before the SEC can bring an action. I think that
21:48
Speaker 1: is extremely interesting, and it's aggressive. It is certainly aggressive,
21:52
Speaker 1: and I think they are certainly trying to take advantage
21:55
Speaker 1: of a favorable venue. They may believe the SEC would
21:59
Speaker 1: never decide to file in Texas given its past experience
22:03
Speaker 1: with the Fifth Circuit, and that may very well proved
22:06
Speaker 1: to be true, but it's also unclear. The decision has
22:09
Speaker 1: not been made, and I think this is an interesting
22:12
Speaker 1: choice of litigation strategy and we'll see how it turned out.
22:16
Speaker 2: Thanks so much, Jim. That's Professor James Park of UCLA
22:19
Speaker 2: Law School. Coming up next. Delta sues CrowdStrike. This is Bloomberg.
22:25
Speaker 2: Delta Airlines is suing cybersecurity firm CrowdStrike over the chaos
22:30
Speaker 2: caused this summer by a software update that disabled millions
22:34
Speaker 2: of computers worldwide and grounded much of the airline's passenger fleet.
22:39
Speaker 2: Delta is accusing the cybersecurity firm of gross negligence that
22:43
Speaker 2: costs the airline five hundred million dollars. CrowdStrike apologized publicly
22:49
Speaker 2: after the July nineteenth glitch that shut down computers running
22:53
Speaker 2: the Microsoft Windows operating system, paralyzing airports, banks, stock exchanges
23:00
Speaker 2: businesses around the world, But CrowdStrike says Delta is giving misinformation,
23:06
Speaker 2: doesn't understand cybersecurity, and is trying to shift the blame
23:10
Speaker 2: for its slow recovery from the outage, joining me is
23:14
Speaker 2: an expert in cybersecurity, doctor Ilia Koloshchenko. He's a partner
23:18
Speaker 2: in cybersecurity practice, lead at PLAT Law and CEO of
23:23
Speaker 2: Immune Web. This was a global technology outage, so isn't
23:29
Speaker 2: it obvious that CrowdStrike bears the blame.
23:33
Speaker 4: I don't think it would be fair to say that
23:36
Speaker 4: it is crowdstrikes fault before we get all the texts.
23:41
Speaker 4: Of course, I'm not saying that CrowdStrike is completely blame last,
23:46
Speaker 4: but I'm unconvened that we have solid matters to claim
23:53
Speaker 4: financial damages, and I believe that we need to investigate
23:57
Speaker 4: these cases a little bit more because, based on crowd
24:00
Speaker 4: strike public announcement and the details that they disclosed about
24:07
Speaker 4: the incident, such kind of incidents may happen virtually everywhere,
24:12
Speaker 4: so it was not like a negligence that can we
24:15
Speaker 4: can Reprimand I think, what do.
24:18
Speaker 2: We know so far about what caused this?
24:21
Speaker 4: So to the depth of my knowledge, it was a
24:24
Speaker 4: faulty update that was not tested as sophisticatedly as it
24:31
Speaker 4: could see, and as a result, we have the many
24:36
Speaker 4: machines that were using CrowdStrike software that became unusable, inoperable
24:43
Speaker 4: for several hours at least, and actually this caused a
24:48
Speaker 4: lot of inconvenience around the globe.
24:50
Speaker 2: Delta claims the incident could have been prevented by testing
24:55
Speaker 2: the software update on just one computer. Does that pointed negligence?
25:01
Speaker 4: This will probably be the very cracks of the lawsuits
25:05
Speaker 4: if we have a lossit not for a virtual contract
25:08
Speaker 4: boss In towards, I think that it will be difficult
25:12
Speaker 4: to prove that crowd strike was negligent unless we get
25:17
Speaker 4: some addition materials during the discovery phase or we have
25:23
Speaker 4: any expert witnesses who will be able to testify that
25:27
Speaker 4: crowd strikes software testing and deployment process was below the
25:35
Speaker 4: industry acceptable standards. But I think it will be a
25:39
Speaker 4: challenge and probably we will end up with many different
25:43
Speaker 4: experts saying, you know, contradicting things. And at the end
25:47
Speaker 4: of the day, I think it's fair to accept that
25:50
Speaker 4: new software is perfect and we have a new regular
25:54
Speaker 4: bug fixes and updates. I'm not talking about security patches, okay,
25:58
Speaker 4: but I'm talking about you know, errors and buck success
26:01
Speaker 4: in Microsoft software, in Apple software. So this is like,
26:05
Speaker 4: you know, commonly acceptable reality that no software is immune
26:11
Speaker 4: from small bags and issues. So I think crowd Strike
26:15
Speaker 4: will insie that it has been duly following all applicable
26:21
Speaker 4: processes and procedures to ensure the best reasonable quality of
26:27
Speaker 4: its software and of its coptic Delta.
26:31
Speaker 2: Is accusing CrowdStrike of gross negligence? What would it take
26:35
Speaker 2: to prove that?
26:36
Speaker 4: So? I think they have. Gross negligence is a very
26:41
Speaker 4: high standard of proof in civil litigation, and I don't
26:46
Speaker 4: think that they will manage to prevail on this claim
26:50
Speaker 4: unless we don't know some facts that are probably known
26:54
Speaker 4: to the plainting. Okay, negligence is possible, Okay, but gross
27:00
Speaker 4: negligence I don't think it will be the case. And
27:03
Speaker 4: I'm especially you know, capt icilled out unity damages because
27:08
Speaker 4: the alleged misconduct of CrowdStrike has to be so eregious
27:14
Speaker 4: that it would deserve in its punishment. So I honestly
27:18
Speaker 4: don't think that gross negligence and unity damages will prevail.
27:24
Speaker 5: Delta attributes the scope of the adage on crowdstrikes efforts
27:28
Speaker 5: to alter other operating systems through uncertified and untested shortcuts
27:34
Speaker 5: that damage and impaired its client systems and businesses. Is
27:39
Speaker 5: that difficult to prove?
27:40
Speaker 4: I don't think it will be difficult to prove when
27:44
Speaker 4: I think it's give an attack that was admitted by CrowdStrike.
27:49
Speaker 4: But the reality is that many security products do very
27:55
Speaker 4: similar things because they need to have full control of
27:59
Speaker 4: your machine, of your device in order to protect it completely.
28:04
Speaker 4: There are alternative ways to do the same thing, Bob.
28:09
Speaker 4: It's like you know, arguing, whether you know Android software
28:14
Speaker 4: that is an open source sulftware is better than IOP
28:18
Speaker 4: software that is for pree three closed first sulfware, Whether
28:22
Speaker 4: it's better to have Linux versus Microsoft. So it's an
28:27
Speaker 4: open question, and I don't think that justin based on
28:31
Speaker 4: these facts, they will be able to prove even negligent laft,
28:35
Speaker 4: a little gross.
28:36
Speaker 2: Negligence, a crowd Strike spokesperson said, speaking of finger pointing.
28:41
Speaker 2: Delta's claims are based on disproven misinformation, demonstrate a lack
28:46
Speaker 2: of understanding of how modern cybersecurity works, and reflect a
28:50
Speaker 2: desperate attempt to shift blame for its slow recovery away
28:54
Speaker 2: from its failure to modernize its antiquated IT infrastructure. What
28:59
Speaker 2: do you think of that respons.
29:00
Speaker 4: Well, I think this is like a response that I
29:04
Speaker 4: would expect. However, you know, probably the one thing that
29:08
Speaker 4: deserves your attention. Is that actually when we talk about
29:14
Speaker 4: negligence or even if they see you for breach of contracts,
29:18
Speaker 4: I would probably say that crowd Strike will also argue saying, listen,
29:25
Speaker 4: you've been using our software for a long period of time.
29:29
Speaker 4: You had all the documentations, your IT people, your cybersecurity
29:34
Speaker 4: people will fully aware of how it works, of what
29:38
Speaker 4: exactly we do, how it operates you or web through
29:43
Speaker 4: all our terms of services, framework agreements, whatever they may
29:48
Speaker 4: have in place. So now you know, telling us that
29:52
Speaker 4: you are kind of you know, flob a gaset, you know,
29:55
Speaker 4: ambushed by these very facts you know how our software works,
30:00
Speaker 4: doesn't sound credible because you've been aware of these facts
30:04
Speaker 4: since the very beginning, or you should have been aware
30:08
Speaker 4: of it. So now saying that it's a big surprise
30:11
Speaker 4: and you have shocked doesn't sound They're like a credible claim,
30:16
Speaker 4: And here I think they will get some attention from
30:20
Speaker 4: the jury.
30:21
Speaker 5: What about a breach of contract claim.
30:24
Speaker 4: Well, that's a very interesting question because if they have
30:26
Speaker 4: a contract, it really depends on the contract. And I think,
30:30
Speaker 4: you know, unless crowd strike made some important concessions and
30:36
Speaker 4: agreed to remove some of the clauses that expressly limit, reduce, exclude,
30:43
Speaker 4: or cap their liability for certain incidents. I think Delta
30:49
Speaker 4: chances to succeed fairly modest usually all cyber secure against it.
30:56
Speaker 4: Under they have variance lawyers who know how to write
31:01
Speaker 4: in a good tech contracts excluding or limiting their liability
31:07
Speaker 4: to the full extent permitted by laws. So under the contract,
31:11
Speaker 4: I'm not sure they will have much success. Maybe they
31:14
Speaker 4: will get some nominal damages, but in this case it
31:18
Speaker 4: will be a questionable victory in court because they'll probably
31:22
Speaker 4: spend more money in their legal costs than they will
31:26
Speaker 4: eventually stain at the end, and if they do so,
31:31
Speaker 4: I think if this ends up in court, I'm confident
31:35
Speaker 4: will have an appeal. So I don't think understand that
31:39
Speaker 4: a litigation here is the best way to resolve this
31:44
Speaker 4: regrettable incidents. I would rather settlement that would be mutually
31:48
Speaker 4: there for Delta and for Crowdstright, because the breach of
31:52
Speaker 4: contracts for me sounds we claim unless Delta managed to
31:56
Speaker 4: change in new default contractual and saying that Crowdstrights will
32:03
Speaker 4: be liable to the fullest extent for all directs indirect damagers.
32:07
Speaker 4: In this case, it can be very problematic for crowds work, right,
32:11
Speaker 4: But I don't think it's the case.
32:14
Speaker 2: Are there consequences for other companies from this lawsuit?
32:19
Speaker 4: I think that this case may open a fron door box,
32:25
Speaker 4: because if it ends up in court, then probably all
32:30
Speaker 4: cybersecurity and tax vendors will start urgently modifying their contract
32:35
Speaker 4: in terms of services as the lays. Of course, it
32:38
Speaker 4: will be in a very fact specific and it will
32:41
Speaker 4: depend on the decision of the court. If the parties
32:45
Speaker 4: don't settle and do this in a discrete, calm and
32:50
Speaker 4: considential matter to everyone's satisfaction, I think it will create
32:54
Speaker 4: a dangerous precedence first and second will probably see a
32:59
Speaker 4: lot of the lawsuits not only against crowd Strike up Basic,
33:04
Speaker 4: but also all other companies are saying, oh listen, I
33:08
Speaker 4: had a problem with my iPhone. You know, I'm sewing Apple.
33:11
Speaker 4: So it can cause you the kind of avalanche of lawsuits.
33:16
Speaker 4: So I really hope that the parties will find an
33:19
Speaker 4: amicable resolution of this regrettable incident.
33:23
Speaker 2: Thanks for being on the show. That's cybersecurity expert doctor
33:26
Speaker 2: Ilia Koloshenko, and that's it for this edition of the
33:30
Speaker 2: Bloomberg Law Podcast. Remember you can always get the latest
33:33
Speaker 2: legal news by subscribing and listening to the show on
33:36
Speaker 2: Apple Podcasts, Spotify, and at bloomberg dot com, slash podcast,
33:40
Speaker 2: slash Law. I'm June Grosso and this is Bloomberg