by T. GormanPosted on Posted in SECActions

Many of the cases brought recently by the Commission have been either offering fraud or microcap issuer cases with the latter often centered on pump-and-dump manipulations. These cases typically fleece unsuspecting investors who purchase what appear to be inexpensive securities based on some type of guaranteed return or assurance against lost in the case of offering fraud actions or the lure of quick profits from an about to increase stock in the case of the manipulations. The outcome in all of these cases is the same – the investors lose their hard earned savings.

Some cases follow a different pattern. For example, some cases involve public officials taking a bribe in return for steering business to others. In those cases the pattern is different but for investors it is the same, they lose although it may not be as apparent. Once such case is SEC v. Webb, Civil Action No. 17-8685 (N.D. Ill.), a pay-to-play case.

Defendant David Webb is the mayor of the City of Markham, Illinois. In connection with a 2012 municipal bond offering designed to fund city capital projects, Mr. Webb engaged in a pay-to-play scheme. The mayor approached a contractor involved in the city capital projects and solicited a bribe. In return Mr. Webb agreed to steer a multi-million construction project to the contractor. The project would be funded from the offering proceeds of the municipal bond offering.

The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the action Mr. Webb consented to the entry of a permanent injunction based on the Sections cited in the complaint in late 2017. This week the Court entered the final judgment after determining monetary remedies. The Court entered permanent injunctions based on the Sections cited in the complaint. The mayor was also barred from participating in further municipal bond offerings. In addition, Mr. Webb was directed to pay disgorgement of $85,000 and prejudgment interest of $32,849.35. Those amounts were deemed satisfied by the restitution order entered in the parallel criminal case. See Lit. Rel. No. 25160 (August 9, 2021).

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by T. GormanPosted on Posted in SECActions

Crypto assets continue to generate controversy. Recently, at least one Commissioner proposed a “safe harbor” which apparently would give firms involved with the assets a period of time to evaluate them without concern about regulatory questions. The assets for a time hindered the passage of a huge infrastructure bill pending in the U.S. Senate. And, the Commission is litigating with some firms and individuals over the application of the Howey test to crypto assets of various types.

None of this deters entrepreneurs from creating new crypto assets and investors from purchasing them. Blockchain Credit Partners, for example, created two new tokens that were used in connection with a money market program that raised millions of dollars in a short period. The Commission, however, brought an enforcement action that unraveled the business. In the Matter of Blockchain Credit Partners, Adm. Proc. File No. 3-20453 (August 6, 2021).

The action names as Respondents the firm, also known as DeFi Money Market or DMM which owned DMG tokens when they were created and obtained the proceeds from sales; Gregory Keough, a founder of DMM and owner of 50% of Blockchain Credit Partners; and Derek Acree, also a founder of Blockchain Partners and 50% owner of Blockchain Credit.

Over a period of about one year, beginning in early 2020 Messrs. Keough and Acree, along with Blockchain Credit, operated DeFi Money Market. DDM offered investors 6.2% interest on digital assets. The funds were to come from what were called “real world assets” otherwise known as car loans.

Two types of digital assets were available, the mToken and the DMG token. The former paid 5.25% interest. The latter were marked as “governance tokens.” Those tokens gave purchasers certain voting rights, a share of excess profits and the ability to profit from DMG resales in the secondary market. Overall, in excess of $17million in mTokens were sold and $13.9 million in DMG tokens.

The DMM business was built by programmers who created the architecture underlying the smart contracts and tokens. They also identified assets that could generate interest for mTokens and surplus profits for the DMG token holders.

The mTokens were securities, according to the Order. In fact, they were notes offered and sold as investment contracts. Purchasers were led to believe that the profits they would receive would come from the efforts of Respondents from managing DMM. That included the auto loans which were purchased. While those assets were acquired, they remained in a separate entity – ownership was not transferred.

The DMG tokens were also securities. They were offered and sold as investment contracts. The reasonable expectation of profits came from the claim that DMG would use the proceeds to operate and develop the business and then share the profits with investors. The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b).

To resolve the matter, Respondents agreed to certain undertakings. Those included an agreement to assist mToken holders with redemption. In addition, Respondents Keough and Acree will refrain for five years from directly or indirectly participating in an offering of a digital asset security, excluding any personal transactions. Respondent DMM will also refrain from participating in any offering of digital assets.

Respondents consented to the entry of cease-and-desist orders based on the Sections cited in the Order. In addition, Messrs. Keough and Acree will be prohibited for five years from serving as an officer or director of any issuer. Respondents will also pay disgorgement of $12,849,354, and prejudgment interest of $258,052. Respondents Keough and Acree will each pay a penalty of $125,000.

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