FOIAengine: New York AG Targets Diem Association, aka Libra
It was the end of January 2022, and Stuart Levey was celebrating. As the Treasury Department’s former Under Secretary for Terrorism and Financial Intelligence, he’d handled his share of tough assignments. But perhaps none so tricky as the job he’d just pulled off.
No longer at Treasury, Levey now was CEO of a snake-bitten Facebook-funded start-up known as the Diem Association. Facebook’s goal, as announced in 2019, was to create a stablecoin – a type of cryptocurrency – that would let the social network’s billions of users spend money as easily as sending a text message. But the project quickly ran into a political buzzsaw in Washington. Three people who couldn’t agree on anything else – then-President Donald Trump, Rep. Maxine Waters (D-Calif.), chair of the House Financial Services Committee, and Fed Chairman Jerome Powell – all opposed it. Mark Zuckerberg was hauled before Congress to defend it. Lawmakers already knew what happened to personal information and photos on social media. “Do you really think people should trust Facebook with their hard-earned money?” asked Sen. Sherrod Brown (D-Ohio).
Diem was doomed.
The brief, ignoble history of Diem Association might have been just one more footnote, if that, for the dominant social-media company that had $117 billion in revenue last year. But in the aftermath of the cryptocurrency scandal that continues to cast a shadow on the banking industry and the larger economy, scapegoats and deep pockets are sought. A request in PoliScio’s FOIAengine database reveals that there is at least one prosecutor – New York Attorney General Letitia James – who may be looking into whether Facebook’s sale of Diem to a shaky cryptocurrency bank might have been a domino in the chain reaction of bank failures.
James’s office has 700 lawyers, plus another 1,000 investigators and support staff. One of James’ securities-fraud investigators recently filed a previously unreported FOIA request with the Securities and Exchange Commission for the agency’s files on Diem.
FOIA requests can be an important early warning of bad publicity or litigation to come. But a FOIA request to a federal agency from a state AG – FOIAengine counts 23 such requests since 2021 – can also be an end-around a subpoena, and an early signal of potential civil or criminal jeopardy. That is why PoliScio Analytics’ competitive-intelligence database FOIAengine tracks FOIA requests in as close to real-time as their availability allows. Of particular interest are requests that may portend bad news for companies or their executives. That is what we see here.
By the time Levey came aboard in August 2020, Facebook’s Diem initiative was already on life support. It had a new name – changed from the original, Project Libra – and new financial partners after some original backers couldn’t take the regulatory heat and bailed out. But Facebook, aka Meta (NASDAQ:META), knew where this was going. The company brought in M&A boutique Architect Partners (“we operate at the front lines of crypto”) to broker a sale. O’Melveny & Myers, Skadden Arps, and crypto specialists Fenwick & West would do the legal work.
Finally, on January 31, 2022, Levey announced that Diem would be sold to California-based Silvergate Capital, which operated Silvergate Bank, a leading provider of financial services to the cryptocurrency industry. Silvergate paid $50 million in cash – so, presumably the legal and advisory fees at least were covered – and gave Diem another $132 million in stock. Levey washed his hands of the matter with a rhetorical flourish that didn’t mention the train wreck left on the tracks behind, and also didn’t anticipate what was to come.
“Despite giving us positive substantive feedback on the design of the [Diem] network,” Levey said, “it nevertheless became clear from our dialogue with federal regulators that the project could not move ahead. As a result, the best path forward was to sell the Diem Group’s assets, as we have done today to Silvergate. We remain confident in the potential for a stablecoin operating on a blockchain, designed like Diem’s, to deliver the benefits that motivated the Diem Association from the beginning. With today’s sale, Silvergate will be well-placed to take this vision forward.”
Well, not quite. In early January 2023, less than a year after buying Diem, Silvergate Capital shut down the project in the wake of the Sam Bankman-Fried/FTX scandal, taking a $196 million hit. “A blockchain-based payment solution . . . is no longer imminent, “ Silvergate explained to its shareholders.
In fact, the outlook was beyond bleak: By then, Silvergate Bank had lost three-fourths of its crypto-centric $12 billion in deposits as customers fled to the safety of larger banks. Two months later, on March 8, 2023, Silvergate Bank liquidated, becoming the first cryptocurrency-industry bank to crash and burn. Silicon Valley Bank, First Republic Bank, and Signature Bank soon would follow.
Silvergate’s stock (NYSE:SI), which traded as high as $230 a share in late 2021, was most recently at 63 cents a share before the New York Stock Exchange suspended trading last week and took steps to delist it for failing to file financial reports.
In a statement to shareholders filed with the SEC on May 11, Silvergate said it had sufficient funds to pay off all its depositors. But shareholders were wiped out. Silvergate said it has “potential contingent liabilities related to, among other things, the regulatory and other inquiries and investigations that are pending . . . including private litigation.” Silvergate said it couldn’t hazard a guess as to what those damages might total.
Silvergate, which has about 80 people remaining on staff to wind down the business, didn’t respond to emailed questions about the investigations and litigation. Attorney General James also didn’t respond to questions about why her investigator asked for the SEC’s Diem records, and whether she believed Meta could have civil or criminal liability in connection with the asset sale to Silvergate. Levey did not respond to questions emailed to him via LinkedIn.
Already, plaintiff’s lawyers are circling.
Bragar Eagel & Squire and Pomerantz LLP are among the plaintiff’s firms soliciting claimants for potential litigation. Multiple actions against Silvergate are pending on behalf of its long-term shareholders. According to Bloomberg, the Justice Department also has a criminal investigation underway, focused on Silvergate’s dealings with Bankman-Fried and the fallen crypto giants FTX and Alameda Research.
And the New York Attorney General’s office also has the expertise, resources, and legal authority to get involved if James so chooses. Her office’s FOIA request for the SEC’s records about Diem indicates her interest. James has filed numerous other lawsuits alleging cryptocurrency fraud, and has sought a higher profile and greater involvement in the crypto scandals by encouraging anonymous crypto whistleblowers. Earlier this year, her office filed suit against Alex Mashinsky, founder of the bankrupt lending platform Celsius. James alleged Mashinsky defrauded “hundreds of thousands of investors, including more than 26,000 New Yorkers, out of billions of dollars’ worth of cryptocurrency.”
Meanwhile, Levey, who brokered the sale of Diem, swiftly moved on. A month later, still listed as Diem’s CEO, he joined a coterie of crypto experts who met with SEC Chairman Gary Gensler. By October 2022, Levey was at his next gig: chief legal officer at software giant Oracle. Silvergate was in the rear-view mirror, and he had already wished it all the best: “We look forward to seeing the design choices – and the ideals – of Diem thrive.”
Next: Investigative reporters, asking questions. About what?
John A. Jenkins, co-creator of FOIAengine, is a Washington journalist and publisher whose work has appeared in The New York Times Magazine, GQ, and elsewhere. He is a four-time recipient of the American Bar Association’s Gavel Award Certificate of Merit for his legal reporting and analysis. His most recent book is The Partisan: The Life of William Rehnquist. Jenkins founded Law Street Media in 2013. Prior to that, he was President of CQ Press, the textbook and reference publishing enterprise of Congressional Quarterly. FOIAengine is a product of PoliScio Analytics (PoliScio.com), a new venture specializing in U.S. political and governmental research, co-founded by Jenkins and Washington lawyer Randy Miller. Learn more about FOIAengine here. To review FOIA requests mentioned in this article, subscribe to FOIAengine.