B Riley Financial and Japanese financial giant Nomura have become entangled in an SEC investigation over a series of controversial deals with blockchain startup core Scientific and other distressed assets linked to the collapse of hedge fund Three Arrows Capital.
SEC Examines Series of Deals Between B Riley, Nomura and Core Scientific
The SEC is probing a number of transactions between B Riley, Nomura and core Scientific, a Bitcoin mining firm that has seen its fortunes fade along with the broader crypto market downturn over the past year.
Specifically, the regulator is focused on a $44 million payment B Riley received from Nomura after advising the Japanese bank on its purchase of equipment leases from Core Scientific. That deal was linked to earlier financing Core Scientific received from Three Arrows Capital, the failed hedge fund at the center of last summer’s crypto lending crisis.
|B Riley Financial
|LA-based investment bank known for distressed asset deals
|Japanese financial services giant
|Bitcoin mining firm now in bankruptcy
|Three Arrows Capital
|Defunct crypto hedge fund that collapsed in June 2022
The SEC is investigating whether B Riley properly disclosed its conflicts of interests in facilitating deals between Core Scientific and Nomura. Sources said the regulator had questions about fees B Riley collected and the overall transparency around its business dealings with struggling crypto firms.
Collapse of Three Arrows Capital Triggered Domino Effect
The demise of Three Arrows Capital last June kicked off a series of cascading failures across the crypto sector. The hedge fund had borrowed heavily to speculate on digital assets and its collapse left a trail of unpaid debts that threatened other crypto lenders.
Core Scientific was one of the companies left exposed by Three Arrows’ unraveling. The Bitcoin miner had expanded aggressively, financing new mining rigs through debt and leases backed by future Bitcoin rewards. When crypto prices plunged, Core Scientific struggled to meet its obligations.
By late 2022, Core Scientific was on the brink of bankruptcy. It sold two mines to Ebang International and then agreed to sell certain mining rig leases to Nomura in a deal advised by B Riley. Just weeks later, Core Scientific filed for Chapter 11.
B Riley Known For Taking Risks on Distressed Assets
As an investment bank focused on distressed companies, B Riley has a track record for taking risks on assets other Wall Street firms won’t touch. It’s part of a controversial but lucrative “vulture investing” strategy: snap up assets on the cheap from struggling companies, nurse them back to health, and sell at a profit.
B Riley has deployed this playbook repeatedly during economic shocks like the 2008 financial crisis and 2020 COVID-19 crash. The crypto meltdown offered yet another opportunity to profit from others’ misfortunes.
In addition to the tainted Core Scientific financing, B Riley helped struggling lender Celsius Network raise emergency funding last June through a sale of tokens to its own crypto investment funds.
What Comes Next in the SEC Investigation
Details remain scarce on the exact focus and timeline of the SEC probe. But legal experts say both B Riley and Nomura face heightened scrutiny and potentially significant penalties if regulators determine they failed to make proper disclosures around conflicted deals.
Japanese authorities are also said to be reviewing Nomura’s crypto activities through an internal audit. Like B Riley, Nomura has significant exposure to distressed digital assets. The century-old firm invested in some of Three Arrows Capital’s key funds.
For Core Scientific, the SEC investigation is just the latest challenge as it navigates bankruptcy proceedings. The mining firm risks seeing its remaining assets picked over at fire sale prices by vulture investors – quite possibly including B Riley itself.
The crypto sector meltdown sparked calls for tighter regulation around digital asset investing. The SEC probe into B Riley and Nomura’s dealings may inform new guidance for Wall Street firms looking to profit off crypto’s volatility.
Table: Key dates in Core Scientific financing saga
|Core Scientific raises $300M+ via equipment leases from Three Arrows
|Three Arrows Capital collapses
|Core Scientific sells two mines to Ebang International
|Core Scientific sells mining rig leases to Nomura in deal advised by B Riley
|Core Scientific declares bankruptcy
|SEC launches investigation into B Riley and Nomura
The SEC investigation promises to shine a light on the murky relationships between Wall Street institutions looking to capitalize on crypto’s uncertainties. For B Riley and Nomura, it threatens not just financial penalties but also further reputational damage as regulators scrutinize their risk management in the notoriously volatile digital asset space.
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