SEC Sues Individual for Fraud and Misappropriation in Crypto Scheme
Commentary by Gage Raju-Salicki
The SEC charged an individual and related defendants with fraud and misappropriation in a global crypto investment scheme.
In a Complaint filed in the US District Court for the Eastern District of Virginia, the SEC alleged that the individual offered unregistered securities through a company that "claimed to be a crypto asset and foreign exchange trading company." As alleged by the SEC, the individual and his associates told investors that the company was generating "large passive returns" through such trading. The SEC highlighted that investors were shown fabricated profits on online dashboards, which "misled those investors regarding the status of their investments." The SEC said the individual raised nearly $200 million from investors. The SEC alleged that the company conducted little to no trading and used funds from new investors "to pay other investors their purported returns and referral rewards in a Ponzi-like scheme."
The SEC further alleged that the individual misappropriated over $57 million in investor funds, which he used to purchase luxury real estate, expensive cars and high-end items. The SEC alleged that the individual "knew or was reckless in not knowing" that his representations about trading activity and returns were false.
The SEC charged the individual and related defendants with violations of the registration and anti-fraud provisions of the federal securities laws, including Securities Act Sections 5(a), 5(c), and 17(a), and Exchange Act Section 10(b) and Rule 10b-5 ("Employment of manipulative and deceptive devices").
The SEC is seeking permanent injunctions, disgorgement, civil penalties and recovery of funds from the individual and related defendants.
Commentary
These charges come just one day after the new SEC Chair was sworn in. It may augur what SEC enforcement related to crypto will look like going forward. This case returns the SEC's focus to alleged fraud and misappropriation. It does not attempt to or rely on defining a crypto asset. That shift reflects the new Chair's articulated goal to move away from regulation by enforcement.
With a market structure act for digital assets potentially on the horizon, and stablecoin legislation working its way through Congress, this anti-fraud action from the Commission suggests a return to fundamentals. 10b-5 anti-fraud actions remain a potent tool in the SEC's arsenal. Digital asset protocols should take note.