The SEC’s complaint outlined 13 charges, accusing the company and Mr Zhao of unlawfully soliciting investors and customers, misrepresenting the degree of trading on the platform and misleading the public about its oversight.
Both the crypto firm and its founder are also alleged to have diverted customer funds to companies controlled by Mr Zhao, a Chinese-Canadian billionaire known in the industry as CZ.
Mr Zhao and Binance “engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” SEC Chair Gary Gensler said in announcing the 136-page lawsuit.
“The public should beware of investing any of their hard-earned assets with or on these unlawful platforms,” he added.
The filing comes as US authorities pledge to use existing laws to root out fraud and other issues in the crypto industry, especially after the dramatic collapse of Binance rival FTX last year.
The Commodity Futures Trading Commission, another US financial regulator, filed its own lawsuit against Binance in March, accusing it of operating in the country illegally. It is also under investigation by the Department of Justice.
Binance and Mr Zhao showed “blatant disregard of the federal securities laws and the investor and market protections these laws provide”, the SEC said in the lawsuit.
“In so doing, defendants have enriched themselves by billions of US dollars while placing investors’ assets at significant risk.”
Efforts to evade regulators were widely recognised inside the firm, which earned at least $11.6bn in revenue from US customers between June 2018 and July 2021, according to the lawsuit, filed on Monday in federal court in Washington, DC.
“We are operating as a … unlicensed securities exchange in the USA bro,” the company’s chief operating officer told another compliance officer, using an expletive, in 2018, according to the lawsuit.
Binance knew that tens of thousands of customers were in the U.S. but chose not to act, the SEC alleged, despite federal law barring the unregistered offer and sale of securities. Binance’s ultimate compliance, in 2019, was largely a public show, the SEC complaint continues.
The SEC alleges Zhao ordered the creation of an evasion plan for high-net-worth customers, using a VPN service to hide their U.S. location and submitting compliance documents to obscure their country of origin.
Most damaging to investors, they allegedly engaged in “wash trading,” trading with themselves to artificially prop up the price of crypto assets.
Sigma Chain collected $190 million for its beneficial owner Zhao, the SEC alleged. The “proprietary trading firm” then spent $11 million to purchase a “yacht,” the complaint said.
The defendants showed a “blatant disregard” for federal law, the SEC alleged. The complaint included a “high-level” breakdown of Binance’s ownership structure, with Zhao and his holding vehicles allegedly controlling 100% of Binance and Binance.US’ various entities.
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