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Cumberland DRW LLC, Subsidiary of DRW Holdings, Faces United States SEC Enforcement Action for Alleged Unregistered Securities Trading

On 10 October 2024, the United States Securities and Exchange Commission sought to initiate legal proceedings against Cumberland DRW LLC, a crypto liquidity provider operating through its trading platform Marea. The complaint, filed in the United States District Court for the Northern District of Illinois, alleges that Cumberland has been engaging in the unregistered sale of securities in the form of crypto assets since at least March 2018. These actions, the United States SEC claims, constitute violations of Section 15(a) of the United States Securities Exchange Act of 1934. The SEC asserts that by trading billions of dollars worth of crypto assets as securities without registering as a securities dealer, Cumberland deprived investors of the protections afforded under United States securities laws, which are designed to ensure transparency, oversight, and accountability in the marketplace.

Cumberland DRW LLC, the firm at the centre of the United States SEC’s allegations, is a Delaware-based limited liability company with its principal office in Chicago, Illinois. Originally operating under the name Cumberland Mining & Materials LLC prior to February 2019, the firm has since rebranded to Cumberland DRW LLC. It is a subsidiary of DRW Holdings, LLC (DRW Holdings), a well-known privately held financial services firm. DRW Holdings owns several registered broker-dealers that engage in various securities trading activities, spanning across numerous asset classes. Cumberland operates primarily through its online trading platform Marea. The platform allows Cumberland to trade crypto assets for its own account, providing price quotes and executing transactions with counterparties.

The United States SEC’s complaint alleges that Cumberland’s business model is based on capturing the spread I.e. difference between the buy and sell prices of these crypto assets, which have been classified as securities and thus require dealer registration to ensure compliance with federal regulations. Cumberland allegedly marketed and promoted its trading operations to counterparties through various channels and disseminated research reports and updates on the crypto market, allegedly marketing the investment potential of specific crypto assets. These promotional efforts, according to the United States SEC, allegedly solidified Cumberland’s position as an unregistered dealer, as it encouraged counterparties to view crypto assets as securities and profit-generating investments based on the managerial efforts of the asset issuers.

The United States SEC identifies several specific crypto assets that Cumberland traded during the relevant period, including MATIC (Polygon), SOL (Solana), ATOM (Cosmos), ALGO (Algorand), and FIL (Filecoin) which meet the legal definition of securities under United States law. The United States SEC alleges that investors were led to expect profits based on the efforts of the promoters and developers behind these assets, which makes them investment contracts and, therefore, securities. By trading these assets, Cumberland is alleged to have acted as a dealer without registering with the United States SEC or qualifying for any exemptions under the United States Securities Exchange Act.

Throughout the period in question, Cumberland allegedly profited from its trading activities and generated more than $400 million in revenue from its crypto trading business, while continuing to operate without proper registration.

Cumberland DRW LLC, for its alleged failure to register as a securities dealer while trading billions of dollars worth of crypto assets classified as securities has allegedly violated Section 15(a) of the United States Securities Exchange Act of 1934, and is accused of depriving investors of critical protections designed to ensure transparency, market fairness, and accountability.

United States SEC seeks a permanent injunction to prevent Cumberland from continuing to violate United States securities laws, which would legally restrain Cumberland from operating as an unregistered dealer, effectively halting its current business practices unless the firm complies with the necessary registration requirements. The United States SEC also demands disgorgement of all ill-gotten gains that Cumberland obtained through its alleged illegal activities and return profits earned through the sale of unregistered securities. US SEC also seeks prejudgment interest, which would compensate for the time value of the unlawfully earned profits from the time they were made until they are returned. The United States SEC further prays that the court impose civil monetary penalties on Cumberland under Section 21(d)(3) of the United States Securities Exchange Act.

Jorge G. Tenreiro, Acting Chief of the SEC’s Crypto Assets and Cyber Unit (CACU) in his statement stated that: “The federal securities laws require all dealers in all securities to register with the Commission, and those who operate in the crypto asset markets are no exception,” he added “Despite frequent protestations by the industry that sales of crypto assets are all akin to sales of commodities, our complaint alleges that Cumberland, the respective issuers, and objective investors treated the offer and sale of the crypto assets at issue in this case as investments in securities, and Cumberland profited from its dealer activity in these assets without providing investors and the market with the important protections afforded by registration.”

(Source: https://www.sec.gov/newsroom/press-releases/2024-169)