Four (Revised) Questions for Ari David Paul of BlockTower Capital
Tags: Cryptocurrency, Blocktower, Blockchain, Ari Paul, Bitcoin

Paul states “Stellar will announce an acquisition of Adam Ludwin’s Chain sometime in the next 2 weeks. This is not widely known, but at least some funds know.”

Who are these entities?

Stellar:

Stellar is a platform that connects banks, payments systems, and people. It claims to ‘Integrate to move money quickly, reliably, and at almost no cost.’ The Stellar token is XLM. (Paul: “For example, if I thought XLM was a great buy because of the Chain announcement, I would first buy it then tell you.”) XLM is a cryptoasset, but is it a security? This has great significance in the eventual judgement of Ari David Paul.

Details of the Stellar Team, Developers, Board Members, and Advisors.

Adam Ludwin:

CEO at Chain. @adamludwin on Twitter.

Chain:

Chain is a San Francisco based technology company on a mission to enable a smarter and more connected economy.They build cryptographic ledgers that underpin breakthrough financial products and services.

Insider Trading

What is Insider Trading?

From Investopedia:

Insider trading is the buying or selling of a security by someone who has access to material nonpublic information about the security.

Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal when the material information is still nonpublic.

Illegal insider trading includes tipping others when you have any sort of nonpublic information. Legal insider trading happens when directors of the company purchase or sell shares, but they disclose their transactions legally.

The Martha Stewart Case

Directors of companies are not the only people who have the potential to be convicted of insider trading. In 2003, Martha Stewart was charged by the SEC with obstruction of justice and securities fraud — including insider trading — for her part in the 2001 ImClone case.

Stewart sold 4,000 shares of biopharmaceutical company ImClone Systems based on information received from Peter Bacanovic, a broker at Merrill Lynch. Bacanovic’s tip came after ImClone Systems’ chief executive officer (CEO), Samuel Waksal, sold all his shares of the company. This came around the time ImClone was waiting on the Food and Drug Administration (FDA) for a decision on its cancer treatment, Erbitux.

Shortly after these sales, the FDA rejected ImClone’s drug, causing shares to fall 16% in one day. The early sale by Stewart saved her a loss of $45,673. However, the sale was done based on a tip she received about Waksal selling his shares, which was not public information.

After a 2004 case, Stewart was charged with lesser crimes of obstruction of a proceeding, conspiracy, and making false statements to federal investigators. Stewart served five months in a federal corrections facility.

To summarise the chain of events in the Martha Stewart case:

ImClone Systems’ chief executive officer (CEO), Samuel Waksal, sold all his shares of the company when he learned the FDA’s decision. Peter Bacanovic, a broker at Merrill Lynch, tipped this info. to Martha Stewart. She sold. Food and Drug Administration (FDA) announces its negative decision on ImClone cancer treatment. Shares crash. Martha prosecuted and imprisoned. Bacanovic imprisoned. Waksal imprisoned.

The question about Paul is whether these events transpired.

Stellar and Chain privately agree terms to an acquisition. This can be expected to be positive news for the XLM price when it is announced. Someone passes this information to Paul. Did Paul buy XLM? Did Blocktower buy XLM? On 5 May 2018 Paul DMs Kazonomics and, totally unsolicited, tips the inside information, to Kazonomics. Kazonomics understands that he has been placed in a dangerous position and blows the whistle. On 20 June 2018 Fortune breaks the news of the acquisition of Chain by Stellar.

Was Ari David Paul Insider Trading?

If Paul had access to insider information about an imminent acquisition of Chain by Stellar and divulged that information to third parties with a view to them buying Stellar XLM, would that be insider trading?

The answer surely depends on two things.

Did Paul have insider information?

Yes. I have searched Google, the websites of Stellar and Chain, Twitter, the Twitter accounts of Stellar, Chain, Adam Ludwin, and Ari Paul, and there is no information about an imminent acquisition of Chain by Stellar until the Fortune story on 20 June 2018.

2. Is Stellar a security?

The whole matter of whether certain cryptoassets are securities or not is the subject of public debate. The SEC seems to have ruled that Bitcoin and Ethereum are not securities.

The jury is still out on Stellar XLM and Ripple XRP, which are tokens of a very similar nature. However the consensus is forming that XRP (and most likely XLM) will be defined as securities. That is bad news for Ari David Paul.

But until that matter is settled, whether XLM is a security, it seems that Ari Paul has a ‘get out of jail’ card.

There was no increase in the price of XLM when Fortune broke the Stellar/Chain story. Is this a possible defence for Paul? It seems not:

Ten [Original] Questions for Ari David Paul of BlockTower Capital

[These questions were written before the news of the Stellar/Chain deal became public on 20 June 2018.]