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SEC Freezes $8M in Assets in Alleged Fraudulent Token Offering Scheme

79 points by Dowwie 7y ago

rolltiide 7y ago
> The SEC filed charges against Reginald “Reggie” Middleton, a self-described “financial guru,” WOAH they went after Reggie Middleton! Yeah that should be in the title. From "TheBlockCrypto.com" > What appears to have precipitated this filing, in part, is that after the SEC told Defendants’ lawyers that they were likely to recommend filing of enforcement action, Defendants “moved more than $2 million in remaining offering proceeds from a blockchain address they controlled into other addresses, and used a portion of those funds to purchase more precious metals.” When asked by staff to not spend any more of the SEC funds, Defendants refused. > https://www.theblockcrypto.com/2019/08/13/sec-files-emergency-lawsuit-against-veritaseum-to-stop-spending-millions-of-dollars-in-ico-money/ https://www.theblockcrypto.com/2019/08/13/sec-files-emergenc... So this is interesting in that there was active discussion between the SEC and Reggie's lawyers. This is different than most of these press releases.
- lowdose 7y ago
  You are completely right. This guy doubled down twice when he burned through his funds. And got caught with his hands in the cookie jar. You wonder if this crypto guy actually understood his digital transactions are traceable in the future. This is such an amateur hour, it is probably why he operated alone. What a character, I am looking forward to the movie. > Explained to viewers in a series of YouTube videos introducing the Offering that their “purchase of Veritas goes directly to fund the transformation of finance” and that “when you purchase Veritas, you create, you fund, the decentralization of this central authority;” that “since Veritas should be or will be a scarce commodity, the more people that come in, the more entities that come in, the more users of Veritas, the greater the demand for Veritas and the more valuable the Veritas is”; and that once potential institutional investors “start looking at these numbers, 30,000% returns . . . negative correlation of assets, there’s going to be a flood, when that flood comes in” there will be “higher demand” for VERI's. Middleton sold 1.9 million VERI tokens during the ICO phase, raising approximately $14.8 million in 2017.
  - rolltiide 7y ago
    He understood the transactions were traceable: everything he did is okay when operating under a consumer product framework and not a securities framework. So when moved to securities framework unilaterally by the SEC, then all prior actions and current actions are put under scrutiny too to rationalize putting the prior asset sale as a security There is another perspective and that hearing is reportedly in a few weeks. Its not to disagree with the SEC over securities status, just to come to more agreeable terms over the emergency order and understand why people acted the way they did, instead of a broad paintbrush of malice as described by this docket.
- elliekelly 7y ago
  Wow, that complaint is kind of nuts. The SEC is accusing him of just about every major financial crime imaginable. But the "Related Individuals and Entities" section broke my heart: > Employee One, age 18, has worked for Veritaseum since 2017. Stealing/embezzling money is disgusting enough but he very well could have ruined this 18 year old kid's life. I generally find the SEC to be pretty reasonable so I would imagine the kid is only included so they can't transfer funds either but I really hope this kid/kid's parents were smart enough to get a lawyer and cooperate.
  - PeterisP 7y ago
    Does that imply that he was 16-17 old minor at the time when the crimes were committed?
    - elliekelly 7y ago
      The major crimes, yes, but unless they had a birthday in the last two weeks they were a legal adult when the company moved funds after hearing that the SEC was preparing to bring charges.
  - rolltiide 7y ago
    SEC isnt saying that anyone is stealing or embezzling money. They are saying that there was no registration that would give him the green light to do everything they are accusing him of. The SEC merely wants registration and fine print disclaimers. All the actions they outlined are just rationalizing to the judge why they want jurisdiction under securities laws - where misleading statements without contradictory disclaimers are sanctionable through civil court, instead of the consumer protection framework where blatant marketing lies are okay. They also need to describe how this was done knowingly, in order to leave room for the DOJ to charge him under criminal securities laws, where ignorance actually is a defense, so they have to prove he was knowingly violating securities laws. Moving money he collected isnt the issue at all here.
    - elliekelly 7y ago
      I was careful in both my reading of the documents and in the words I chose when commenting. I said "accusing" and not "charging" for good reason. But make no mistake, the SEC is absolutely accusing him of embezzlement (see paragraph 6 of the complaint), securities fraud (paragraphs 2-3), market manipulation (paragraphs 2, 5 & 7), running a Ponzi scheme (paragraph 9), and an unregistered securities offering, as you mentioned. You'll notice all of those accusations carry the potential for criminal charges - except one: an unregistered securities offering. The SEC is an administrative regulatory agency, not a law enforcement agency. That means the SEC brings civil actions to enforce securities laws and then works closely with the Department of Justice to recommend criminal charges against those same defendants. The SEC gathers all of the evidence, brings the civil charges, and then hands the file over to the DOJ for criminal enforcement. I will absolutely, positively, unequivocally guarantee that the DOJ will follow up with criminal charges. And the SEC's charging document is a sneak preview of what those charges will be. The process is usually more coordinated than this but it sounds like Middleton is a particularly stupid defendant. Typically a defendant's attorney would be made aware of forthcoming charges from the SEC (as happened here) and then negotiate a simultaneous plea deal (with the DOJ) and settlement (with the SEC). Instead, the SEC sought an _emergency_ injunction to prevent him from continuing to move the money because he started moving money around when he learned of the forthcoming charges. His moving the funds was the impetus for the SEC filing. If the SEC "merely wants registration and fine print disclaimers" an emergency injunction to freeze client funds would be entirely unnecessary.
charlesdm 7y ago
An "emergency freeze" of moneys that were raised in 2017 and 2018... On Aug. 12, 2019, the court entered an emergency freeze to preserve at least $8 million of the $14.8 million the defendants raised in 2017 and 2018 in an offering of digital securities."
- FireBeyond 7y ago
  "What appears to have precipitated this filing, in part, is that after the SEC told Defendants’ lawyers that they were likely to recommend filing of enforcement action, Defendants “moved more than $2 million in remaining offering proceeds from a blockchain address they controlled into other addresses, and used a portion of those funds to purchase more precious metals.” When asked by staff to not spend any more of the SEC funds, Defendants refused."
russdpale 7y ago
Good, time to start cracking down on all of the scams so the space can actually flourish.
- cma 7y ago
  The token scheme space?
- arcticbull 7y ago
  If they actually crack down what would be left? I mean other than my boy Dentacoin naturally haha.
  - Nuzzerino 7y ago
    The ideas behind many of the projects are good on paper, but in my experience it seems that many of the people involved can't be trusted. I don't know whether it's because the lack of regulation (or rather enforcement of it) in the space attracts the con artist types, or whether it leads to previously honest people committing frauds when they realize they can get away with it. I've heard ideas about how the industry could regulate itself to keep bad actors out of the way, but I've yet to see any real progress. Whatever regulation happens at this point is deserved imo.
    - pjc50 7y ago
      Something about a firehose of money given on the flimsiest of prospectus seems to cause fraud. Can't think why.
- javert 7y ago
  I disagree. For me, being barred by the government from making an investment is a bug, not a feature. Although it isn't obvious, I would hold that this is true for any rational investor. In reality, these sorts of regulations only exist to keep reckless people from losing money that they already treat as disposable. That is not a valid reason to block the freedom of genuine investors.
novalis78 7y ago
Mr Middleton sat next to me during the Ethereum launch at the TNAB in Miami in 2014. He was very excited about all the possibilities Bitcoin and cryptocurrency would usher in. His pet project then was a platform to allow kids in Africa buy and sell shares reflecting the US stock market. The idea was to globalize investing by tokenizing shares. Very innocent beginnings and dreams of a better, more financially enabled world. This report sounds like a lot changed since.
- gamblor956 7y ago
  US stock markets are already open to global investors...
  - novalis78 7y ago
    Teens in subsaharan Africa.
    - AaronFriel 7y ago
      I'm still not seeing how a blockchain or bitcoin plays a fundamental role here? Teens (edit: adults) in subsaharan Africa can own stock, so can most Americans. They don't and I don't think it's for lack of blockchains or digital wallets.
      - deleted 7y ago
        [deleted]
      - wgerard 7y ago
        > Teens in subsaharan Africa can own stock, so can most Americans is that true? I thought most states had age requirements for trading securities, usually the age of majority. Unless you're not trying to say that "most american teens can own stock".
        arcticbull 7y ago
        Breaking the law is not a good reason to have a blockchain. If the law is bad it should be revisited. I've got me a theory the law is good here.
jonas21 7y ago
Any idea who Investor One is (according to the complaint, they're a "connected political figure")?
- michannne 7y ago
  He's pretty popular. I've seen him mentioned in various other SEC court documents

79 points by Dowwie 7y ago

> The SEC filed charges against Reginald “Reggie” Middleton, a self-described “financial guru,” WOAH they went after Reggie Middleton! Yeah that should be in the title. From "TheBlockCrypto.com" > What appears to have precipitated this filing, in part, is that after the SEC told Defendants’ lawyers that they were likely to recommend filing of enforcement action, Defendants “moved more than $2 million in remaining offering proceeds from a blockchain address they controlled into other addresses, and used a portion of those funds to purchase more precious metals.” When asked by staff to not spend any more of the SEC funds, Defendants refused. > https://www.theblockcrypto.com/2019/08/13/sec-files-emergency-lawsuit-against-veritaseum-to-stop-spending-millions-of-dollars-in-ico-money/ https://www.theblockcrypto.com/2019/08/13/sec-files-emergenc... So this is interesting in that there was active discussion between the SEC and Reggie's lawyers. This is different than most of these press releases.

lowdose 7y ago
You are completely right. This guy doubled down twice when he burned through his funds. And got caught with his hands in the cookie jar. You wonder if this crypto guy actually understood his digital transactions are traceable in the future. This is such an amateur hour, it is probably why he operated alone. What a character, I am looking forward to the movie. > Explained to viewers in a series of YouTube videos introducing the Offering that their “purchase of Veritas goes directly to fund the transformation of finance” and that “when you purchase Veritas, you create, you fund, the decentralization of this central authority;” that “since Veritas should be or will be a scarce commodity, the more people that come in, the more entities that come in, the more users of Veritas, the greater the demand for Veritas and the more valuable the Veritas is”; and that once potential institutional investors “start looking at these numbers, 30,000% returns . . . negative correlation of assets, there’s going to be a flood, when that flood comes in” there will be “higher demand” for VERI's. Middleton sold 1.9 million VERI tokens during the ICO phase, raising approximately $14.8 million in 2017.
- rolltiide 7y ago
  He understood the transactions were traceable: everything he did is okay when operating under a consumer product framework and not a securities framework. So when moved to securities framework unilaterally by the SEC, then all prior actions and current actions are put under scrutiny too to rationalize putting the prior asset sale as a security There is another perspective and that hearing is reportedly in a few weeks. Its not to disagree with the SEC over securities status, just to come to more agreeable terms over the emergency order and understand why people acted the way they did, instead of a broad paintbrush of malice as described by this docket.
elliekelly 7y ago
Wow, that complaint is kind of nuts. The SEC is accusing him of just about every major financial crime imaginable. But the "Related Individuals and Entities" section broke my heart: > Employee One, age 18, has worked for Veritaseum since 2017. Stealing/embezzling money is disgusting enough but he very well could have ruined this 18 year old kid's life. I generally find the SEC to be pretty reasonable so I would imagine the kid is only included so they can't transfer funds either but I really hope this kid/kid's parents were smart enough to get a lawyer and cooperate.
- PeterisP 7y ago
  Does that imply that he was 16-17 old minor at the time when the crimes were committed?
  - elliekelly 7y ago
    The major crimes, yes, but unless they had a birthday in the last two weeks they were a legal adult when the company moved funds after hearing that the SEC was preparing to bring charges.
- rolltiide 7y ago
  SEC isnt saying that anyone is stealing or embezzling money. They are saying that there was no registration that would give him the green light to do everything they are accusing him of. The SEC merely wants registration and fine print disclaimers. All the actions they outlined are just rationalizing to the judge why they want jurisdiction under securities laws - where misleading statements without contradictory disclaimers are sanctionable through civil court, instead of the consumer protection framework where blatant marketing lies are okay. They also need to describe how this was done knowingly, in order to leave room for the DOJ to charge him under criminal securities laws, where ignorance actually is a defense, so they have to prove he was knowingly violating securities laws. Moving money he collected isnt the issue at all here.
  - elliekelly 7y ago
    I was careful in both my reading of the documents and in the words I chose when commenting. I said "accusing" and not "charging" for good reason. But make no mistake, the SEC is absolutely accusing him of embezzlement (see paragraph 6 of the complaint), securities fraud (paragraphs 2-3), market manipulation (paragraphs 2, 5 & 7), running a Ponzi scheme (paragraph 9), and an unregistered securities offering, as you mentioned. You'll notice all of those accusations carry the potential for criminal charges - except one: an unregistered securities offering. The SEC is an administrative regulatory agency, not a law enforcement agency. That means the SEC brings civil actions to enforce securities laws and then works closely with the Department of Justice to recommend criminal charges against those same defendants. The SEC gathers all of the evidence, brings the civil charges, and then hands the file over to the DOJ for criminal enforcement. I will absolutely, positively, unequivocally guarantee that the DOJ will follow up with criminal charges. And the SEC's charging document is a sneak preview of what those charges will be. The process is usually more coordinated than this but it sounds like Middleton is a particularly stupid defendant. Typically a defendant's attorney would be made aware of forthcoming charges from the SEC (as happened here) and then negotiate a simultaneous plea deal (with the DOJ) and settlement (with the SEC). Instead, the SEC sought an _emergency_ injunction to prevent him from continuing to move the money because he started moving money around when he learned of the forthcoming charges. His moving the funds was the impetus for the SEC filing. If the SEC "merely wants registration and fine print disclaimers" an emergency injunction to freeze client funds would be entirely unnecessary.

charlesdm 7y ago

An "emergency freeze" of moneys that were raised in 2017 and 2018... On Aug. 12, 2019, the court entered an emergency freeze to preserve at least $8 million of the $14.8 million the defendants raised in 2017 and 2018 in an offering of digital securities."

FireBeyond 7y ago
"What appears to have precipitated this filing, in part, is that after the SEC told Defendants’ lawyers that they were likely to recommend filing of enforcement action, Defendants “moved more than $2 million in remaining offering proceeds from a blockchain address they controlled into other addresses, and used a portion of those funds to purchase more precious metals.” When asked by staff to not spend any more of the SEC funds, Defendants refused."

russdpale 7y ago

Good, time to start cracking down on all of the scams so the space can actually flourish.

cma 7y ago
The token scheme space?
arcticbull 7y ago
If they actually crack down what would be left? I mean other than my boy Dentacoin naturally haha.
- Nuzzerino 7y ago
  The ideas behind many of the projects are good on paper, but in my experience it seems that many of the people involved can't be trusted. I don't know whether it's because the lack of regulation (or rather enforcement of it) in the space attracts the con artist types, or whether it leads to previously honest people committing frauds when they realize they can get away with it. I've heard ideas about how the industry could regulate itself to keep bad actors out of the way, but I've yet to see any real progress. Whatever regulation happens at this point is deserved imo.
  - pjc50 7y ago
    Something about a firehose of money given on the flimsiest of prospectus seems to cause fraud. Can't think why.
javert 7y ago
I disagree. For me, being barred by the government from making an investment is a bug, not a feature. Although it isn't obvious, I would hold that this is true for any rational investor. In reality, these sorts of regulations only exist to keep reckless people from losing money that they already treat as disposable. That is not a valid reason to block the freedom of genuine investors.

novalis78 7y ago

Mr Middleton sat next to me during the Ethereum launch at the TNAB in Miami in 2014. He was very excited about all the possibilities Bitcoin and cryptocurrency would usher in. His pet project then was a platform to allow kids in Africa buy and sell shares reflecting the US stock market. The idea was to globalize investing by tokenizing shares. Very innocent beginnings and dreams of a better, more financially enabled world. This report sounds like a lot changed since.

gamblor956 7y ago
US stock markets are already open to global investors...
- novalis78 7y ago
  Teens in subsaharan Africa.
  - AaronFriel 7y ago
    I'm still not seeing how a blockchain or bitcoin plays a fundamental role here? Teens (edit: adults) in subsaharan Africa can own stock, so can most Americans. They don't and I don't think it's for lack of blockchains or digital wallets.
    - deleted 7y ago
      [deleted]
    - wgerard 7y ago
      > Teens in subsaharan Africa can own stock, so can most Americans is that true? I thought most states had age requirements for trading securities, usually the age of majority. Unless you're not trying to say that "most american teens can own stock".
      - arcticbull 7y ago
        Breaking the law is not a good reason to have a blockchain. If the law is bad it should be revisited. I've got me a theory the law is good here.

jonas21 7y ago

Any idea who Investor One is (according to the complaint, they're a "connected political figure")?

michannne 7y ago
He's pretty popular. I've seen him mentioned in various other SEC court documents