SEC Charges 11 With Illegal Pyramid Scheme
Pyramid schemes are typically a variation of a Ponzi scheme. The typical scheme ultimately yields profits for the promoters and losses for the investors. The Commission’s latest case in this area adds new components, however. It is built on crypto, tied to the blockchain, employs “smart contracts” and “wallets.” It is international. The end is the same however – promoters make money; investors lose. SEC v. Okhotnikov , Civil Action No. 22-cv-3978 (N.D. Ill. Filed August 1, 2022).
The Commission named 11 individuals as defendants in the complaint. The defendants can be divided into three groups: 1) The Founders: Vladimir Okhotnikov, a Russian nation who is a co-founder of Forsage and the “face” of the operation; Jane Doe about whom little is known except her public name of Lola Ferrari; Mikail Sergeev, also a Russian national and a co-founder of Forsage; and Sergey Maslakov, a resident of Moscow and also a co-founder of Forsage. 2) The Promoters: Samuel Ellis, the lead promoter of Forsage; Mark Hamlin, a lead promoter; Sarah Theissen, an ambassador to the Crypto Crusaders group and a lead promoter of Forsage in the U.S. 3) The Crypto Crusaders: Carlos Maertinez, a co-founder of the group; Ronald Deering, also a co-founder of the group; Cheri Beth Bowen, a co-host of many promotional events; and Alisha Sheppard, also a co-host of many webinars.
Forsage is a website that permits large numbers of retail investors in the United States and other countries to enter into transactions using smart contracts created by the Founders on the Ethereum, Tron and Binance blockchains. During the period, beginning at the end of January 2020 and continuing to the present, the Founders perpetuated Forsage and its smart contracts through aggressive promotions. The Founders also engaged the promoters to promote Forsage and Forsage hosted platforms. In doing so the Fonders engaged in the offer and sale of unregistered securities in Forsage as detailed below. Transactions to date total over $300 million.
Beginning in early June 2020 the Crypto Crusaders led the largest Forsage promotion group in the U.S. In doing so this group also promoted the sale of unregistered securities in Forsage as did the Founders. This is because Forsage is a classic pyramid and Ponzi scheme. It did not sell any product. The primary way for investors to make money was to recruit others to participate in the scheme. To participate, investors created a crypto-asset wallet and then purchased slots in Forsage’s smart contract. That gave them the right to earn compensation for others who they recruited and compensation for the large Forsage community of investors. When an investor purchased a slot, a portion of that investment was directed to the persons who recruited the investor.
During the period Forsage operated on the Ethereum, Tron and Binance blockchains. Algorithmic or smart contracts were used to direct money to an investor as more investors were recruited. The smart contracts were used to allocate payments to investors using a Forsage ID. The structure was created by the Founders who devised and controlled the essential operations of Forsage. The Founders also coded one of Forsage’s smart contracts on the Ethereum blockchain to divert a portion of investor funds to a crypto-asset wallet not associated with a Forsage ID assigned to any investor.
The investor slots in the Forsage smart contracts, and the right of investors to earn compensation from the sale of those slots and profits from shares of profits were in fact investment contracts and securities. Accordingly, the scheme here violated Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b).
Defendants Ellis and Theissen agreed to settle the matter and be permanently enjoined based on the Sections cited in the complaint. They also agreed to pay disgorgement and civil penalties in amounts to be determined by the Court at a later date. The case continues as to the other defendants. See Lit. Rel. No. 25460 (August 1, 2022).