The U.S. government shutdown freezes the SEC investigation! The investigation into the "insider trading" allegations against the Crypto Assets reserve company is temporarily suspended.

Due to Congress's failure to reach an agreement on funding, the U.S. government has been shut down for two months, and the SEC's investigation into whether there was insider trading regarding publicly listed crypto assets has been forced to halt. Several former SEC lawyers have stated that once the government shutdown ends and reopens, the agency will almost certainly restart the investigation, and if the investigation escalates to a full inquiry, the regulator could issue subpoenas within just one to two months. Trump's relationship with these companies has made the SEC investigation a “sensitive topic.”

Government shutdown freezes SEC investigation with less than 10% of staff remaining

The longest government shutdown in U.S. history is likely to result in the SEC halting its investigation into whether there are any actions involving publicly listed crypto assets that could be considered insider trading. Currently, less than 10% of SEC employees are on duty, and the agency's investigation into the crypto assets treasury has likely been suspended, as most employees engaged in investigative work may have been temporarily laid off.

According to The Block, an SEC spokesperson stated that during the shutdown starting on October 1, the SEC is continuing to work according to its established agency plans. The SEC can respond to emergencies related to personal safety or property protection. Most people expect the deadlock between the Republican and Democratic parties to eventually end, allowing the U.S. government to reopen and people to return to their jobs.

For the SEC, the end of the government shutdown likely means that lawyers, accountants, and other personnel involved in investigative work will resume their duties from before the shutdown. FINRA is a self-regulatory organization responsible for establishing and enforcing rules for registered brokers, and during the government shutdown, it continues to operate normally. According to regulators, self-regulatory organizations are not federal agencies and are funded by regulated members. FINRA declined to comment when asked about the investigation.

Insider trading suspicions arise as abnormal trading patterns attract attention

(Source: The Block)

In late September, about a week before the U.S. government shutdown began, The Wall Street Journal reported that the SEC and FINRA contacted several publicly traded companies that had adopted new business strategies for purchasing Crypto Assets earlier this year, inquiring about unusual patterns in trading volumes and stock price fluctuations that may occur in the days leading up to the release of critical company information.

According to The Wall Street Journal, SEC officials have specifically warned companies that their actions may violate the Fair Disclosure Regulation (Regulation FD). This regulation strictly prohibits publicly traded companies from disclosing significant non-public information to individuals who may use that information for stock trading decisions. “The SEC and FINRA may not necessarily view this as an insider trading case right away,” said Howard Fischer, a former senior trial attorney at the SEC, to The Block. “They would say, 'Let's investigate this, because it looks like there was unusual volatility in the company's stock before the company disclosed information about adopting a digital asset treasury strategy to the public.'”

In addition to Bitcoin and Ethereum, the two most popular digital assets (DAT), some listed companies have also decided to purchase large amounts of other types of Crypto Assets. To date, billions of dollars have been invested in DAT. Fisher stated that while it is currently unclear what regulators are focusing on, they are likely analyzing market activity. He said, “If you look at the daily trading volume charts before they announce such activities, you will notice a huge spike, so it is clear that someone knows what is going to happen or has predicted it based on other information and has bought securities in hopes of profiting when the market experiences such volatility.”

Voucher Issuance Timeline and Company Response Strategy

Multiple former SEC lawyers have stated that once the government shutdown ends, the regulatory agency will almost certainly resume its investigations. If the inquiry escalates to a full investigation, the regulatory body may issue subpoenas within just one to two months. “If the trading is suspicious, and there is a close connection between company insiders (who hold significant non-public information) and individuals trading on that information, that may be enough to issue subpoenas,” said David Chase, a former SEC enforcement lawyer and current defense attorney, to The Block.

According to a former SEC lawyer, whether the government ultimately issues subpoenas after reopening largely depends on how the parties receiving the letters respond to the regulatory agency. The agency may also issue voluntary information requests, Fischer stated, noting that such situations are now more common than during the Trump administration. Voluntary information requests refer to the SEC actively seeking documents during the investigation process. Although such requests are not legally binding, a refusal by the requested party may trigger a subpoena.

Kris Swiatek, a partner at Seward & Kissel LLP, specializes in digital asset business. He told The Block that how the company responds to initial inquiries will play a significant role in whether the SEC takes further action and issues subpoenas. “Ultimately, each public company and any parties involved in transactions they have entered into will judge based on their own circumstances,” Swiatek said.

Potential Targets of SEC Investigation

Insiders: Executives and board members who have access to significant non-public information.

External Personnel: Investors or partners invited to provide financing for these transactions.

Intermediaries and Advisors: Brokers, lawyers, or financial consultants who may obtain information prior to a transaction.

Chase stated that if a subpoena is issued, the SEC will likely request to review telephone calls, emails, text messages, and social media communications records. Subsequently, after hearing testimonies, the SEC may decide whether there is sufficient evidence to propose charges and issue a Wells Notice. A Wells Notice is a notification issued by SEC staff to inform the relevant company that the agency's staff may recommend enforcement action against it.

Trump's relationship makes the investigation a sensitive topic

A legal advisor for a large Crypto Assets venture capital firm has warned that some individuals concerned about the matter fear that the SEC's investigation into digital asset funds may uncover internal violations related to an organization connected to the Trump family. “There are some concerns about the Trump family regarding DAT,” the individual stated, adding that due to the president's close relationship with the Crypto Assets treasury, regulation of DAT is a “sensitive topic.”

Although there is no evidence suggesting that the Trump family has engaged in any wrongdoing, nor is there evidence indicating that the SEC is investigating any companies associated with the president, Trump is linked to more than one DAT company, including ALT5 Sigma, which is listed on NASDAQ and holds reserves of the native crypto asset WLFI from World Liberty Financial, a decentralized finance (DeFi) project backed by Trump. The Trump Media & Technology Group, which owns Truth Social, has also adopted a crypto asset fund management strategy.

However, what encourages this advocate is that, regardless of how friendly the Trump administration is towards Crypto Assets, the SEC is working to determine whether any wrongdoing has occurred. “This is what the SEC should be doing. We want them to really pay attention to those emerging areas, where activity is surging and there are suspicious peer-to-peer transactions,” they said. “If we want Crypto Assets to develop well, this is what we want the SEC to do.”

Regulatory attitude changes but enforcement standards remain unchanged

Although the DAT phenomenon has not been around for long, the SEC's scrutiny of crypto assets companies and personnel is not new. However, since President Trump took office, there has been a significant change in the way the U.S. government (including the SEC) treats cryptocurrency organizations, and senior figures in digital assets have welcomed this seemingly pro-crypto government.

“There is no doubt that the regulatory agencies' attitude towards Crypto Assets has changed under the leadership of the new government,” Swiatek said, adding that the SEC's investigation could ultimately mark the first time during Trump's second term that the agency questions the behavior of companies operating in the digital asset space.

“As the intersection between digital assets, venture capital, and the public market increases, controlling important information also requires a learning process,” he told The Block. “One issue that exists in certain transactions in this field is what people refer to as information leakage, where some wrongdoers disclose information related to potential transactions, leading to rumors about pending transactions in the market before formal filing.”