Tether-investigating FSS law firm aiming for more cryptocurrency work
Louis Freeh talks about the future of crypto, and conflict of interest as an occupational hazard.
Louis Freeh, of the Freeh, Sporkin and Sullivan (FSS) law firm has opened up about the Tether investigation and the firm's plan for future cryptocurrency work in an interview with Yahoo! Finance.
It's a prestigious and well-known firm. Louis Freeh is a former FBI director and Eugene Sullivan is a former US federal judge.
To briefly recap:
- Tether (USDT) is a US dollar-pegged cryptocurrency. It works by having real US dollars ostensibly held in a vault somewhere, and then distributing the USDT cryptocurrency in line with its holdings.
- Two major question marks have sprung up around Tether. One is ongoing allegations of bitcoin price manipulation, and the other is the question of whether or not the Tether Co. actually has enough US dollar reserves to back up all USDT in circulation. The FSS law firm is involved in answering the second question.
- Tether claims that it has enough US dollar reserves to support its USDT, but no auditor has confirmed this. After a failed attempt at retaining a real auditor, Tether later announced that it would not be getting an audit, and that's that. Instead it retained the FSS law firm to investigate Tether, and the question of whether or not it has enough holdings.
- FSS concluded that yes, Tether could have enough US dollar reserves, while cautioning that it wasn't an official audit and can't actually be taken as a guarantee of anything.
In the Yahoo! interview, Louis Freeh and his son Justin, who also works at FSS, discussed the unconventional investigation, how it wrangled with the inherent conflicts of interest and the firm's plans for future cryptocurrency work.
On the Tether investigation
The gist of FSS' investigation was that it visited Tether's banks for a surprise inspection.
"It was not an audit, it was an examination and a due diligence. The most essential part was that on a given day of our choosing, unknown to the client, and unknown to the banks with which it is dealing, we would appear at the financial institutions and get a certified, verifiable declaration by the institutions with respect to how much cash and dollars they had on hand," Freeh explained.
The surprise inspection was on 1 June, without Tether or its two banks knowing the selected dates ahead of time. FSS visited and took an "account snapshot" finding that Tether held a total of $2.545 billion, more than enough to cover the $2.538 billion USDT in circulation at the time.
The main catch, in the words of the publicly released FSS report, is that "FSS makes no representation regarding the sufficiency of the information provided to FSS and all inquiries made by FSS have been directed to the Client and/or third party personnel responsible for maintaining such information, and the data has been obtained from the Client and/or third party personnel responsible for maintaining such information."
"FSS has assumed, without further inquiry, that the bank personnel providing the confirmations were duly authorized to provide such confirmations, and that the confirmations were correct."
Essentially, the validity of FSS' findings was only as good as the words of the bank representatives.
This raised some eyebrows due to the potential for conflicts of interest between FSS, Tether and its banks. Freeh addressed these questions by framing conflicts of interest as an occupational hazard that corporate lawyers simply need to rise above through sheer professionalism and ethical strength.
On the conflicts of interest
"We are always asked the question, 'You’re being paid by the client so how can you be independent?' And our response to that is, Look, we have a reputation that we’re very proud of and very protective of. And we never want to be put in a position where we’re doing something to promote an image or facilitate a statement by a client that’s not consistent with the facts. So it's just innate with our work that that’s always an issue for people."
"That's one of the occupational hazards of this type of practice. When I worked as the independent, court-appointed monitor for Daimler, I was paid by Daimler. And the DOJ and SEC of course take that into consideration when they allow a company to pay large amounts of funds to the monitor."
And in this case, the connections between Tether and FSS are believed to run deep and wide.
Sullivan is a board member of Noble Bank, one of Tether's two banks. At the same time, Noble Bank co-founder and CEO John Betts was also a partner at Sunlot Holdings, a company created with the intention of acquiring Mt Gox after its bankruptcy. Freeh himself was an adviser to the company, and his consulting firm at the time was tapped to provide forensic support.
Sullivan is a board member of Noble Bank, one of Tether's two banks, and made the first introductions between FSS and Tether. His connection with the bank is also credited for allowing the review "to commence in a timely and comprehensive manner."
"I can tell you the banking relationships Tether has in place are very strong, and they're with reputable players," Justin Freeh said.
According to Louis Freeh, FSS did everything it could to keep Sullivan separate from the investigation to avoid the potential for conflicts of interest.
"The judge was not on site to conduct any of the interviews with the banking partners. He supervised the engagement but did not participate in the drafting of the report," Louis Freeh said. "We did everything we could to minimize his engagement in this matter. We've done things purposely to make sure this was done as objectively as we can. And the dealings with the bank that he has a relationship with were firewalled."
On going where accountants fear to tread
One of the things that makes Tether unusual is that no accounting firm seems to want to get anywhere near it. Tether's first attempt at an audit, with the Friedman LLC accounting firm, came to an abrupt end in early 2018, with Tether kicking it to the curb and saying "given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame."
It's a strange sentiment, given that the lack of a formal audit has continued to be a sticking point for more than six months since, and that Tether's US dollar reserves are supposedly neatly confined to two banks. If everything is as clear as Tether has maintained, an audit would be a relatively straightforward proposition.
Stranger still, at the same time as Tether retained FSS to conduct its investigation, it announced that it would not be getting an audit because cryptocurrency is simply too complex for accounting firms to handle.
The Yahoo! Finance piece covers this, but incorrectly says "those firms [Ernst & Young, Deloitte, KPMG, PWC] have, for now, declined to take on any cryptocurrency-related work."
That's just plain wrong. Between them, the big four accounting firms have countless cryptocurrency and blockchain clients and partnerships.
For a few small examples: Ernst & Young dove headlong into bitcoin in late 2016, accepting bitcoin payments, installing a bitcoin ATM in its Zurich office and giving employees their own crypto wallets. Deloitte has similarly been advising the cryptocurrency space for a long time and has also started handling bitcoin payments of sorts. KPMG has been providing similar guidance, such as seminars on how to legally pay employees with cryptocurrency. And PWC Hong Kong, also located in Tether's home city, started accepting bitcoin in late 2017 specifically because it was dealing with so many cryptocurrency clients.
The big four accounting firms are up to their eyeballs in cryptocurrency, and to suggest otherwise is somewhere in the triangle between ignorant, unintentionally misleading and barefaced lie.
The interview suggests that Freeh didn't mind repeating the falsehood though.
"Certainly we care [that the big firms won't audit Tether], and we took cognizance of that in terms of deciding whether we could perform a valuable and credible service for this client. We want to make sure we’re providing value, but we were also concerned about our own reputation. And we got comfortable with the idea that we’re not doing an audit, and therefore the fact that the Big Four had declined to enter the space was not a predominant factor for us."
In the future
When asked whether FSS was considering creating a crypto-specific group within the firm, Freeh suggested that it was a definite possibility, hinting at some very well-known appointments.
"We've talked about this at a couple of meetings. We don’t have it formally designated, but we are in the process of actively recruiting a couple of very prominent people in that area. There is one person who is super prominent. If we're successful in that endeavor, I think we will actually form a sub-group."
"We are excited about this work, we have some very good expertise in-house, there’s a lot more out there that we’d like to tap into or acquire. And we could very well spin that into a separate group. We've opened an office in Rome, we're in the process of opening one in London, and that will help us market this particular service once we get our sea legs."
Louis Freeh is a controversial figure. Depending on who you ask he's either an impeccably straightlaced former G-man with an eye for honest investigation, or a highly paid corporate spokesperson of questionable honesty with a long history of renting out his good reputation to shady clients.
Which one did Tether hire?
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, ADA