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Cofounder’s FINRA Suspension Could Hold Consequences for Tezos

FINRA has fined Tezos cofounder Arthur Breitman $20,000 and suspended him from associating with broker-dealers for two years.
Regulation - Cofounder’s FINRA Suspension Could Hold Consequences for Tezos

When Arthur Breitman, cofounder of Tezos, published a white paper on the cryptocurrency project in September 2014, he listed the author as L.M. Goodman. Later, when Breitman disclosed that he was the real author behind the work, many wondered why he used a pseudonym.

As it turned out, at the same time he began working on Tezos, a project that went on to raise $232 million in an initial coin offering (ICO) in July 2017, Breitman was working at investment bank Morgan Stanley. He was also registered as a broker-dealer with the Financial Industry Regulatory Authority (FINRA), a self-regulatory body with oversight of dealers and brokers in the U.S.

FINRA requires registered securities professionals to let their employers know about any for-profit business they are conducting on the sidelines. Breitman, who left Morgan Stanley in 2016 and is no longer registered with FINRA, neglected to inform his employer about Tezos, and the fact he used a pseudonym on the white paper indicates he may have been trying to conceal his involvement.

These and other details of the Tezos project were brought to light in October 2017, when Reuters published a full report on the project, thereby putting Tezos on the radar of regulatory bodies, such as FINRA and the U.S. Securities and Exchange Commission (SEC).

Now, according to an April 19, 2018, report by Reuters, as part of an April 18, 2018, settlement, FINRA has fined Breitmen $20,000 and suspended him from associating with broker-dealers for two years over allegations that he made false statements about the Tezos project during his time at Morgan Stanley.

The question is, how big a deal are these punishments, and will they have any impact going forward on the Tezos project, which has yet to launch?

Relatively Small Fine

FINRA and SEC fines are not uncommon. Anyone who checks the broker records of institutions like RBC, Vanguard and Bank of America, where people in the U.S. and Canada place their money, will see that these financial firms all have dings against them, and, just as Breitman did, most individuals settle by either not confirming or denying the charges.

A look at FINRA’s monthly rundown of disciplinary actions makes it clear that Breitman’s fine of $20,000 is on the low end. Many more of the fines are in the range of hundreds of thousands, if not millions, of dollars. In comparison, this fine appears to be nothing more than a minor slap on the wrist.

More notable is the fact that Breitman was barred from the securities industry for two years. Few people are barred from the securities industry for any length of time, and two years is an upper limit, according to FINRA’s sanction guidelines, which state that “absent extraordinary circumstances, any misconduct so serious as to merit a suspension of more than two years probably should warrant a bar (of an individual) or expulsion (of a member firm) from the securities industry.”

Potential Roadblocks

As spelled out in the Securities Exchange Act of 1934, a broker-dealer is a person or a company that is in the business of buying and selling securities, for its own account or on behalf of its customers or both. The ban essentially means that for the next two years, Breitman cannot associate with any company that is in the business of buying or selling securities, unless he gets a special waiver. Even with a special waiver, he still would not be able to associate directly with the business aspects (deals, committee meetings, financial activities, etc.) of a securities-related company.

If the Tezos tokens, known as “tezzies,” are deemed securities, this may pose a problem for Tezos down the road. Earlier this year, SEC Chairman Jay Clayton stated that all ICO tokens were securities. If the SEC issues a ruling to that effect, then all ICO projects would have to register with the SEC. (Note that some venture capitalists are currently lobbying for exemptions that would allow some tokens to be categorized as “utility tokens” rather than securities.)

The upshot is, having been suspended by the industry, eventually Breitman may have to distance himself from the Tezos project. Robert Hockett, Edward Cornell Professor of Law at Cornell Law School, told Bitcoin Magazine that if the SEC deems Tezos a securities business, the project “will not be allowed to be associated with [Breitman] in any way.”

Of note, Tezos actually consists of two entities: Tezos Foundation, a Zug-based nonprofit that oversaw the Tezos ICO; and Dynamic Ledger Solutions (DLS), a Delaware-based company under the control of Breitman and his wife, Kathleen Breitman, that owns and oversees the development of the Tezos software. Although the two entities are separate, they are also connected; for instance, the Breitmans went after the Tezos Foundation last year to get its then-president deposed. DLS was not directly associated with the ICO, but DLS is shown to be profiting off the buying and selling of securities, then Breitman may be restricted from actively participating in any of the business.

“The securities laws and the SEC define ‘affiliation’ broadly for these purposes,” said Hockett.

In a statement to Reuters, Sarah Lightdale, an attorney for Breitman, played down the settlement. “The settlement with FINRA is unrelated to and has no impact on the launch of the Tezos network,” she said. Then added, “Arthur cooperated fully with FINRA at all times and Arthur is pleased to put this personal matter behind him.”

Update (April 21, 2018): A previous version of this article stated the FINRA settlement had not been made public. It is available here, and was filed under “Arthur Robert Meunier.” Breitman changed his surname from that of his mother to his father’s in 2013.