Joseph Kim, a young Chicago trader just pleaded guilty to stealing $3 million worth of cryptocurrency from the firm that employed him and investors. The case, which involves charges of wire fraud, is the first criminal prosecution for cryptocurrency related violations in the city.

The 23-year-old trader who appeared before Judge Andrea Wood, could potentially be sent to prison for as long as 20 years. He will be sentenced in October, and he may also be ordered to pay back over a million dollars in restitution.

According to the prosecutors´ allegations, the defendant took $3 million from his firm and over half a million from investors. His goal was to make up for losses he incurred due to disadvantageous trades made on his personal account. While he attempted to return some of the Litecoin and Bitcoin he stole from his firm, Consolidated Trading, he still owed over $1.1 million when the misconduct came to light.

A spokesperson for the defendant referred to his behavior as a series of “poor decisions” and said he would “work tirelessly to repay those whose money was lost.”

Cryptocurrency has certain characteristics that make it especially vulnerable to theft. In fact, Kim apparently only began stealing from his firm after he was assigned to cryptocurrency trading, in 2017, roughly a year after he joined Consolidated.

As per firm rules, Kim should have stopped trading cryptocurrency through his personal accounts immediately after he was reassigned to the company´s crypto team, but an FBI investigation revealed he did not comply.

On several occasions, he transferred significant amounts of both Litecoin and Bitcoin to his own cryptocurrency wallet. When he was confronted about it by both colleagues and supervisors, Kim said he was making the illegal transfers for security reasons. But according to the FBI, on many occasions, he failed to give the cryptocurrency back.

After the owners of Consolidated found out about the missing funds, Kim told them in an email that it had not been his intention to steal from them, and that he had been “until the end… perversely trying to fix” what he had done. “I can’t believe I did not stop myself when I had the money to give back, and I will live with that for the rest of my life,” he added.

He was, of course, fired, and decided to go out on his own. Then, he convinced a handful of investors to give him over half a million dollars, which he lost after engaging in high-risk trades.

Kim may be the first individual to be prosecuted for stealing virtual currency in Chicago, but he will certainly not be the last. In the current scenario of increasingly stringent regulations, the cryptocurrency space is bound to see increasing scrutiny into trades, which may lead to more criminal prosecutions of this kind.

HerskovitsPLLC securities lawyers defend advisors and broker-dealers in regulatory and civil actions related to cryptocurrency, securities industry employment, and other matters. Call Us at 212.897.5410 or Connect Online

If you exchanged an official email with any SEC employee recently, you have seen the banner for Howeycoins Travel Network. And if you like to get in on a profitable deal, you probably thought, “well, if the SEC is endorsing them, these guys must be legit.” Perhaps you clicked on the banner to see what it was all about. If so, you must have been surprised at what you found.

Pre-initial coin offering deals usually promise spectacular returns, and HoweyCoins are not the exception. The attractive website for the ICO shows alluring scenes from luxury travel destinations. As you scroll down, you will quickly find that HoweyCoins will yield returns of at least 1 percent daily.

If you are not sold yet, the HoweyCoins.com site quickly boasts, “The average registered coin return over a two month period in 2017 was an amazing 72%.”

However, all these marvels await only those who dare to click on the “Buy” button NOW. A countdown clock gives you only 14 days to receive a special 15 percent bonus. How could you say no?

You will go get your credit card, your bitcoin wallet, your grandma’s golden rings, and invest everything you got. After all, HoweyCoins are “officially registered with the U.S. government… will trade on an SEC-compliant exchange… can be exchanged for cryptocurrencies and cash,” according to the site’s claims.

The U.S. government wouldn’t be in on a scam, now, would it?

Alas, the U.S. government truly is out to deceive you, but only for your own benefit. If you click on the buy button, you will be redirected to Investor.gov, a SEC website, and greeted with the following message, “If you responded to an investment offer like this, you could have been scammed – HoweyCoins are completely fake!”

In reality, HoweyCoins.com is a concoction of the SEC, which created it in an attempt to warn investors about common types of fraud in the cryptocurrency space.

As the Commission explains to users redirected from HoweyCoins.com, “Every investment carries some degree of risk, which is reflected in the rate of return you can expect to receive. High returns entail high risks, possibly including a total loss on the investments. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are guaranteed.”

The SEC actually riddled the HoweyCoins offering with red flags. They wanted to make the site as phoney as possible, so that people would realize how careless they had been once they realized the ICO was fake.

On Investor.gov/howeycoins, would-be HoweyCoins investors will learn that, “many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not… Although some of these platforms claim to use strict standards to pick only high-quality digital assets to trade, the SEC does not review these standards or the digital assets that the platforms select.”

HoweyCoins.com reproduces many features of well-known ICO schemes: it lists a non-existent group of executives (diverse and millennial-friendly, based on the posted photos) and features a number of ‘celebrity endorsements.’

Perhaps, HoweyCoins will do more to educate ICO investors than any other media campaign could, as people who click through the fake site to get a piece of the action will probably think twice before pouring their hard-earned cash into a hot ICO deal with little to offer aside from a bunch of wild claims and an elegant website.

Rob Herskovits is a New York based securities law expert with a nationwide practice. Connect with Rob

FINRA has announced it will increase its scrutiny of the cryptocurrency market. As several regulatory bodies endeavor to establish their jurisdiction over the crypto space, FINRA will now boost its oversight of registered firms’ participation in its burgeoning market.

In a new regulatory notice, the self-regulatory organization asked its 3,700 member firms to notify it if they trade in cryptocurrency, accept cryptocurrency from clients, manage crypto funds, participate in the sale of digital tokens, or even offer advice relating to cryptocurrency.

FINRA will also monitor virtual currency mining and any other related use of blockchain technology.

According to the notice,

“Until July 31, 2019, each firm is encouraged to keep its Regulatory Coordinator updated if it… begins or intends to begin, engaging in a new type of activity relating to digital assets not previously disclosed.”

FINRA has made it clear that it will focus on any involvement in activities connected to digital assets, by both registered firm employees and any of their affiliates.

Firms that are planning to engage in crypto-related activities must also inform the SRO, even if they haven’t yet begun to do so.

FINRA’s Focus Points

According to the text of the notice, issued on July 6, “The types of activities of interest to FINRA if undertaken (or planned) by a member, its associated persons or affiliates, include, but are not limited to:

• Purchases, sales or executions of transactions in digital assets;
• Purchases, sales or executions of transactions in a pooled fund investing in digital assets;
• Creation of, management of, or provision of advisory services for, a pooled fund related to digital assets;
• Purchases, sales or executions of transactions in derivatives (e.g., futures, options) tied to digital assets;
• Participation in an initial or secondary offering of digital assets (e.g., ICO, pre-ICO); creation or management of a platform for the secondary trading of digital assets; custody or similar arrangement of digital assets;
• Acceptance of cryptocurrencies (e.g., bitcoin) from customers;
• Mining of cryptocurrencies;
• Recommend, solicit or accept orders in cryptocurrencies and other virtual coins and tokens;
• Display indications of interest or quotations in cryptocurrencies and other virtual coins and tokens;
• Provide or facilitate clearance and settlement services for cryptocurrencies and other virtual coins and tokens; or
• Recording cryptocurrencies and other virtual coins and tokens using distributed ledger technology or any other use of blockchain technology.”

Cryptocurrency Fraud Prevention and Retail Investor Protection

As the SEC targeted multiple cryptocurrency scams designed to defraud retail investors with the promise of get-rich-quick ICOs and digital tokens that were never actually developed, FINRA is clearly stepping up its oversight of the crypto space in the interest of inadvertent investors.

Firms that fail to disclose crypto-related activities may be at a disadvantage when facing disciplinary action by FINRA, though the notice is not mandatory and, consequently, does not discuss any aspects of enforcement.

If a firm has already notified FINRA about its involvement in digital asset dealings, it need not re-submit the same information.

FINRA said the notice stems from its concern about “fraud and other securities law violations involving digital assets.”

Its contents are in line with the self-regulatory organization’s 2017 warning to investors, issued as a response to several pump-and-dump schemes involving ICOs coming to light.

Securities lawyer Rob Herskovits, founder of New York based Herskovits PLLC, advises and defends securities industry firms and individuals relating to potential or actual regulatory enforcement action. Connect with Rob

A few days before issuing the recent advisory for the cryptocurrency market, the Commodity Futures Trading Commission told the judge in the case against My Big Coin Pay Inc. that cryptocurrencies are commodities, and are therefore within CFTC jurisdiction.

The federal judge in Massachusetts is hearing the case against My Big Coin Pay Inc., a cryptocurrency company that allegedly defrauded dozens of investors out of at least $6 million.

Unsealed earlier this year, a CFTC lawsuit against the issuer of the virtual currency known as My Big Coin Pay first shed light on the company´s questionable practices.

The defendants argued that cryptocurrencies should not be open to CFTC scrutiny because they are not commodities. The CFTC counter-argued that, “Moving defendants’ interpretation would lead to absurd results,” and that the statute, “cannot be read to allow a defendant who is in the virtual currency business to lie, cheat and steal when it comes to virtual currencies similar to bitcoin, which do not underlie futures contracts, but not when it comes to a virtual currency underlying a futures contract, like bitcoin.”

According to the allegations in the case the Nevada-based company, its founder and one of its salesmen conspired to defraud about 28 investors out of six million dollars between 2014 and 2017.

The two defendants allegedly used proceeds from the scheme to fund a lavish lifestyle, including high-end shopping escapades to Las Vegas, and to pay personal debts.

Based on advertisements for My Big Coin, Investors were led to believe that the virtual currency was backed by gold and as widely accepted as major credit cards. Both statements have been found to be false.

While the company´s founder asked the judge to declare the suit meritless, the CFTC reaffirmed its argument that cryptocurrencies are commodities and are thus under its jurisdiction, because a commodity needs not be “tangible” to be regulated as such.

The CFTC specifically argued that virtual currencies such as My Big Coin fall into a category contemplated in the Commodity Futures Trading Commission Act of 1974, namely, “all other goods and articles.”

While the first attempt by the CFTC to hold a company accountable for cryptocurrency fraud failed last year, the current scenario seems more propitious for the regulator to succeed.

Are you or your company a target of CFTC regulatory action? HerskovitsPLLC New York securities lawyers with a national practice helps financial industry participants avoid or defend against CFTC enforcement actions. 212.897.5410 or Connect online

On May 21st, the Commodity Futures Trading Commission issued a new document offering valuable guidance for registered market participants.

The head of the CFTC’s Division of Market Oversight, Amir Zaidi said in an accompanying press release,

“The CFTC staff is committed to providing regulatory clarity as much as possible. As the virtual currency market continues to evolve, CFTC staff will seek to provide additional guidance to help market participants keep pace with innovation while complying with CFTC regulations.”

The advisory’s text explains that Bitcoin and other cryptocurrencies have been defined by the CFTC as commodities since 2015 and warns that, “The significant risks associated with virtual currency markets justify close scrutiny by both CFTC staff and registered entities,” also emphasizing that, “virtual currency platforms present heightened concerns about potential impacts on CFTC-regulated markets, including potential market manipulation, because they lack the transparency and robust regulation as U.S. derivatives platforms.”

The document cites the market’s youth as a potential risk factor, also commenting on the frequency of dramatic price swings.

“This raises questions about whether clearinghouses can adequately assess the inherent risk of virtual currency contracts in setting margin levels for these contracts,” the advisory concludes.

Overview of the Advisory’s Key Areas:

• Enhanced Market Surveillance: Focus on transparency, Know Your Customer and Anti Money Laundering regulations, as well as real-time monitoring “of all trading activity on its electronic trading platforms to identify disorderly trading and any market or system anomalies.”
• Close Coordination with CFTC Surveillance Group: “Staff expects exchanges to regularly discuss with Commission staff a wide range of issues related to the surveillance of virtual currency derivatives contracts, and provide surveillance information as requested by Commission staff.”
• Large Trader Reporting: “Staff recommends that the exchange set the large trader reporting threshold for any virtual currency derivative contract at five bitcoin (or the equivalent for other virtual currencies). Staff believes that this level could help facilitate surveillance of the futures and options markets by increasing the exchange’s ability to focus on relevant information in the spot market.”
• Outreach to Members and Market participants: “Prior to listing a new contract on virtual currency, staff expects an exchange to solicit comments and views on issues relating to the listing, beyond those that relate to the contract’s terms and conditions and its susceptibility to manipulation.”
• Derivatives Clearing Organization Risk Management: “Staff will review the DCO’s proposed initial margin requirements to assess whether they are commensurate with the risks of the contracts, including risks that result from any unusual product characteristics. Staff will review, among other things, the ability of proposed margin requirements to adequately cover potential future exposures to clearing members based on an appropriate historic time period.”
• CFTC Oversight: Regarding the current self-certification for new contracts, the advisory states, “To bring greater transparency to the process, if Commission staff is unable to confirm that the contract being self-certified complies with the CEA and regulations, but the exchange lists (or intends to list) the contract, staff may notify the exchange of its concerns in writing.”

Understanding the CFTC Guidance

According to CFTC Commissioner Rostin Benham, the staff advisory is meant to clarify expectations, but it does not constitute a formal change to the regulatory process.

“Such changes require a more fulsome and formal process, subject to Commission deliberation and public notice and comment. I look forward to continuing to explore our options, which I hope will include some parameters for determining when self-certification may not be appropriate, and for determining when such matters are appropriately brought before the Commission,” the Commissioner said in a speech.

For the head of the regulatory entity’s Division of Clearing and Risk, Brian Bussey, “CFTC staff is providing this information, in part, to aid market participants in their efforts to design risk management programs that address the new risks imposed by virtual currency products.

In addition, the guidance is designed to help ensure that market participants follow appropriate governance processes with respect to the launch of these products.”

Working with virtual currency products? Avoid regulatory problems before they start or head off challenges at their inception. Herskovits PLLC lawyers focus exclusively on securities related regulatory issues. More than 20 years’ experience and well-versed on cryptocurrency issues. Call US 212.897.5410 or Connect Online

The over 80 subpoenas recently issued to companies in the cryptocurrency sector have provided a logical corollary to the agency’s many warnings about ICOs potential violations of security laws.

The time for warnings is over. Now, the SEC’s intentions have evolved into enforcement actions, forever changing the scenario for new cryptocurrency initiatives.

In late 2017, Bitcoin’s spectacular rise in value lured both would-be cryptocurrency developers and new investors with the promise of returns higher than 2,000 percent. Although the digital currency’s value eventually stabilized, these price fluctuations and the surge in ICO initiatives raised alarm among regulators, who pointed to issues of valuation, liquidity, and arbitrage.

One of the main concerns for CFTC and SEC regulators is the lack of transparency that is inherent to blockchain.

While the heads of both agencies have publicly expressed their optimism about the future of financial technology, they have clearly advised companies raising capital through ICOs to take “appropriate steps to ensure compliance with the federal securities laws.”

As per the U.S. Supreme Court’s Howey test to determine what constitutes a security, ICO activities fit the bill: they involve the investment of money with a reasonable expectation to obtain profits resulting from the entrepreneurial/managerial efforts of others. In other words, the sector’s semantic attempts to dodge SEC scrutiny have failed.

The recently issued SEC subpoenas demanded a variety of documents from cryptocurrency companies, from marketing materials, to establish if there has been false advertising, to investor information, and details about organizational structure.

Recent SEC and CFTC Enforcement Actions

• April, 2018 – SEC complaint filed against Centra Tech, a company that used celebrity endorsements and fake CEO bios to lure investors. Their ICO involved a cryptocurrency-funded debit card supposedly backed by Visa and Mastercard. Three executives were arrested.
• April, 2018 – Over $27 million in fintech trading proceeds were frozen after the SEC filed a complaint accusing Delaware-based Longfin of causing a surge in stock prices as a result of the sale of restricted shares and subsequent acquisition of a “purported cryptocurrency business” that had “no ascertainable value.”
• January 2018 – Texas-based AriseBank received a court order halting an offering of its cryptocurrency AriseCoin. According to the SEC, the bank lied to investors when it said it was in the process of acquiring a federally insured bank. Endorsed by sports stars, the ICO was viewed by the SEC as an “outright scam;” one that managed to raise $600 million in barely two months.
• January, 2018: The CFTC filed a complaint against Las Vegas-based My Big Coin Pay, a company that secured $6 million from investors in a virtual currency, through various misrepresentations, and used customer funds for the owners’ personal expenses.
• January, 2018 – The CFTC accused Colorado-based Dillon Michael Dean and his UK-registered company, The Entrepreneurs Headquarters Limited, of engaging in a Ponzi scheme by securing Bitcoin investments, which were subsequently used to pay earlier investors in a commodity pool.
• January, 2018: Patrick K. McDonnell and his New York-based company CabbageTech were charged with “fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin.” The CFTC alleges that the defendants “used their fraudulent solicitations to obtain and then simply misappropriate customer funds.”
• December 2017 – $15 million ICO launched by Munchee Inc. halted by the SEC. The California-based restaurant review company was told it should have registered its endeavor as a securities offering.

2018 Outlook

Since the issuing of the subpoenas and the creation of the SEC’s Cyber Unit, it has become clear that the agency will continue to scrutinize the sale, exchange, and marketing of digital currencies during the rest of the year and beyond.

Regulatory efforts will likely expand, as the SEC appears to be preparing to crack down on a large number of cryptocurrency-focused private fund managers. Disclosures about risk and potential conflicts of interest are likely to become the main targets of the agency’s scrutiny.

Ensuring compliance with federal securities laws is going to be one of the keys to ICO survival. Cryptocurrency entrepreneurs should also keep track of state legislation, as it has been known to define digital tokens in a way that may impact their categorization as securities.

This was recently the case in Wyoming, where “utility tokens” are not deemed to be securities, and Massachusetts, a state that is aggressively enforcing the notion that they are.

On the other hand, the creation of the cross-agency “Distributed Ledger Technology (DLT) Working Group,” which includes the SEC, the CFTC, U.S. Attorney’s Offices, and the Treasury points to continued coordinated efforts to increase and improve regulatory efforts targeting ICOs and other cryptocurrency initiatives.

In the words of a former SEC Commissioner, “there is going to be a ton of enforcement activity.”

If you are facing SEC or CFTC enforcement activity on cryptocurrency or ICO issues, we can help. At Herskovits PLLC we focus exclusively on regulatory defense with specific attention to ICO and cryptocurrency charges. Call early in the process and we might be able to head off an intrusive investigation. 212.897.5410 OR CONNECT ONLINE

Recently, British comedian John Oliver dedicated his weekly show to cryptocurrency. Drawing from a seemingly endless supply of ICO Ponzi schemes, pump-and-dumps, and grandiose cryptocurrency speakers, the program emphasized the hitherto lax regulations that have enabled fraudulent schemes to flourish.

Oliver coined the hashtag #CraefulGang, a play on the popular caption #HODLGang, well known to cryptocurrency enthusiasts. Where a drunken BitcoinTalk poster had advised investors to “HODL” (a typo for hold), Oliver warned them to be “Craeful” and do their own research before giving their savings to obscure ICO companies making wild claims.

Before the SEC zeroed in on the cryptocurrency investment space, announcing that it viewed ICOs as securities and issuing subpoenas left and right, the market was more akin to the Wild West than to Wall Street.

Increased scrutiny has brought numerous scandals, including several arrests. The new scenario is likely to have deterred many an unethical newcomer from raising millions of dollars from investors based on unsubstantiated claims about the next big digital coin.

While Bitcoin has rarely been the choice of the most cautious investors, ICOs are uncharted territory.

The Reddit experts and flamboyant speakers at cryptocurrency conferences mocked by Oliver have created a bubble that is now under threat from regulators, and that has greatly hurt companies looking to enter the market in good faith.

Both the SEC and the CFTC have made it clear that they will do everything in their power to protect retail investors from bad players.

As billions of dollars of private equity flow into ICO endeavors, funding the development of digital currencies that may never take shape, investors often act on instinct and fail to do sufficient research into the CEOs and marketers soliciting their hard-earned dollars.

As regulators adapt to the new landscape and establish new rules and practices, retail investors must, indeed, be “craeful.”

1. Beware of False Advertising

One of the most fascinating bits of Oliver’s show featured an excerpt of a commercial for ICO advertising services promising to multiply investments by 1,000 in a matter of hours, by the sheer power of online ads and social media posts.

ICOs rely on aggressive marketing to tout products that investors lacking tech knowledge cannot even begin to understand.

“Investors should understand that to date no initial coin offerings have been registered with the SEC. If any person today tells you otherwise, be especially wary,”

SEC chairman Jay Clayton warned the public, as it became apparent that cryptocurrency companies were falsely advertising their SEC registration status.

There are numerous cases of false advertising gone badly.

One of the most prominent among them is that of Texas-based Arisebank, which was endorsed by boxing star Evander Holyfield. The crypto banking company advertised its token AriseCoin has having raised over one billion dollars, and said in a social media post that it was acquiring two FDIC-insured banks, a transaction that never took place according to a SEC complaint.

“Because of the ongoing nature of the fraudulent offering and risk of asset dissipation, the SEC seeks emergency relief – including temporary restraining orders, asset freezes, and the appointment of a receiver over AriseBank,”

the SEC concluded, in an attempt to protect investors.

Another case of blatant false advertising and bad faith involves RECoin, once touted as, “The First Ever Cryptocurrency Backed by Real Estate.”

Among other things, REcoin’s founders allegedly misrepresented that they had raised as much as $4 million from investors, when they had barely obtained $300,000. The SEC also alleged that RECoin never made any real estate investments and “lured investors with false promises of sizeable returns from novel technology.”

The moral of these stories is that no matter how good it sounds or which one of your favorite stars is backing an ICO, you should rather rely on advice from a wide range of reputable experts than on the content of ads and company websites.

2. Don’t Forget to Do Your Due Diligence

Investors in Centra Tech were caught off guard when they found out the company CEO’s name and impressive bio were a fabrication, and that Visa had never agreed to back the Centra debit card.

Anyone who would simply search Visa’s corporate announcements or the CEO’s name on Google would have quickly been wise to the scheme. No matter how convenient and legitimate the offer may appear, and even if your favorite baseball star is featured on the ads, do not invest a penny without doing your due diligence.

After all, hundreds of people were fooled intro investing in Centra after they saw Floyd Mayweather’s enthusiastic (and paid) tweets about it.

Bitcointalk.org is an ideal starting point to exercise your due diligence.

The forum usually features new ICO announcements followed by expert and investor comments. When investors ask complicated questions, developers are expected to provide clear answers.

When a company dodges this type of questions, it is not a good sign. To rule out foul play, you can search the forums for terms like scam, fraud, and pyramid scheme. Finally, look for messages from high-ranking, experienced posters for the most reliable tips.

For unbiased reviews of the ICO of your choice, you can visit Coingape.com, Icobench.com, Icoreview.site, and Cryptorated.com.

3. Consider the Company’s Tech Capabilities, Can They Deliver?

Company executives can tout their groundbreaking digital token technology all they want, but if they don’t have a team of developers with a track record in tech and cryptocurrency, their claims may be just words.

When all you have to go on is what people are saying, rather than what they are doing, things can get shady. Can the company prove in any way that it is actually developing technology?

Has it enlisted known experts? Are these experts or company spokespeople readily available to answer technical questions? Is there any actual coding going on?

If there are no satisfactory answers to these questions, then investing may not be such a good idea.

4. Evaluate Project Stage and Venture Capital (VC) Investments

Some projects have only a white paper. Others have a beta version or some early version of the product already out on the market. Another sign of strength and reliability can be the involvement of a reputable cryptocurrency VC. Known crypto VCs, include FBG Capital, China’s Fenbushi, Singapore-based HyperChain Capital, and Blockchain Capital. To be on the safe side, cross-reference the company’s claims with the listed VC’s site and press releases.

5. Don’t Invest in Token Developments That Do not Respond to an Actual Market Need

What can the new token do that Bitcoin or Ethereum can’t?

Why is the project’s blockchain technology necessary?

What is it going to do that the current technologies can’t?

Any company advertising a new digital token should be able to confidently and clearly answer these questions.

6. Don’t Take Valuation at Face Value

One of the biggest challenges for would-be investors in any new market is proper valuation. ICOs have been known to inflate equity valuations on account of speedy growth expectations, but how much of that will remain once the bubble bursts?

The golden rule is to be skeptical of the valuation provided by the ICO’s issuer. Only an independent quantitative analysis can guarantee a realistic valuation of their project.

7. Evaluate Compliance Focus

Beware of companies that antagonize the SEC and take pride in their unregulated, “outlaw” nature.

Regulators are only beginning to develop a framework to protect ICO investors, but companies focused on maintaining legal compliance have a better chance of thriving in the current scenario. Violators and companies that bend the rules too often are becoming a target for the SEC and other agencies, and their days are numbered.

8. Be “Craeful,” but Stay in the Game: “Crypto Market Will Be Much Bigger”

The crypto space is no longer the exclusive arena of risk-prone, tech savvy millennials. Now, voices coming from within established financial institutions are recommending ICO investments.

For instance, former JP Morgan executive Daniel Masters has referred to the rise of cryptocurrencies as a financial revolution.

For Masters, a proud Bitcoin owner since 2012, the “fight to the death between crypto and the USD/GBP legacy financial system” is an obsolete concept and the battle is now over “what portion of the total financial ecosystem accrues to cryptocurrencies.”

In his evaluation of ICOs as a manager of over $800 million in crypto assets, Masters is indeed “craeful.” He explains that less than 3 percent of ICOs that make an offering ever make it through his “multi-stage screening process.”

You can invest in ICOs as much as your heart desires; if your screening process is as stringent as Masters’, you are likely to reap the fruits of this unstoppable financial revolution.

Rob Herskovits, founder of the Herskovits PLLC national securities law firm, represents companies in the ICO and cryptocurrency space – those seeking counsel to comply with SEC rules as well as those alleged to have run afoul of SEC regulations. Call to learn your rights and options. 212.897.5410

Celebrity endorsements add an element of trust for investors who are just entering the ICO market. But the strategy did not turn out well for Centra Tech, as a third arrest has just been made in connection with the SEC’s allegations that the company defrauded investors out of over $25 million.

Earlier this year, I reported on the charges brought against Sohrab Sharma and Robert Farkas, and the public exposure of the alleged fraud.

Sharma, Farkas, and now Raymond Trapani have been charged with falsely advertising their ICO as having links with Visa, and Mastercard, which they claimed were backing their cryptocurrency-funded debit card, “Centra Card.”

Trapani was Centra Tech’s COO. According to the DOJ’s allegations, he co-conspired with Sharma and Farkas to deceive investors by posting a fake CEO bio on Centra Tech’s website and advertising non-existent agreements with established credit card companies.

The SEC’s original complaint against Centra Tech, Sharma, and Farkas has just been amended to include Trapani.

The three defendants, who used to run a luxury car rental company in Florida, enticed investors to entrust millions of dollars to a company that was supposedly run by “Michael Edwards” and “Jessica Robinson,” two executives with an impressive track record; the problem is that neither one of them existed.

The Centra Tech website and its social networks also echoed claims that Visa and Mastercard were backing Centra Card.

Evidence that was instrumental for Trapani’s arrest was found in private communications among the defendants, which were cited by prosecutors in their complaint. For example, on the day the SEC announced it was investigating REcoin, another ICO endeavor, Sharma wrote to Trapani and Farkas: “[The SEC] just shut down REcoin… Read the article… We gotta clean up every single thing that we can’t do… And can’t offer today.”

On another occasion, when a major bank referenced in Centra Tech ads sent them a cease-and-desist letter, Sharma wrote to his partners, “we gotta get that shit removed everywhere and blame freelancers lol.”

Trapani also wrote to Sharma asking him to “cook up” a false document that would enable him to list Centra’s digital tokens in an exchange. To this request, Sharma replied, “Don’t text me that shit lol. Delete.”

According to the criminal charges against Trapani, he “conspired with his co-defendants to lure investors with false claims about their product and about relationships they had with credible financial institutions.”

Deputy U.S. Attorney Robert Khuzam concluded that, “While investing in virtual currencies is legal, lying to deceive investors is not.”

The fact that SEC investigations into fraudulent ICOs are leading to arrests should serve as a cautionary tale for the numerous companies currently making wild claims about their cryptocurrency ventures. In the current ICO and cryptocurrency scenario, sound legal advice is key.

Trapani could face up to 20 years in prison.

Are you part of a team planning an ICO or plan to take investment in your cryptocurrency venture? Herskovits PLLC can help. As securities lawyers exclusively for more than two decades, we know the rules and realities of SEC requirements and how they apply in the new cryptocurrency landscape. 212.897.5410

The SEC is effectively expanding its jurisdiction into the cryptocurrency and ICO market. Dozens of companies, possibly hundreds, are receiving SEC subpoenas, which I advise them to take very seriously.

High profile companies, including giants like TechCrunch’s cryptofund, are currently dealing with these subpoenas. One of the problems is that nobody knows exactly what is going on, and the market is eager for the SEC to clarify the rules.

Do securities laws apply to cryptocurrency? The SEC says they do, but it is yet to issue a detailed guide for compliance. That is why securities lawyers like myself are playing an increasingly important role in the digital currency space right now.

In fact, the current legal uncertainty has driven many companies to move offshore, in order to avoid SEC scrutiny.

In this context, it is important to be prepared in case your company should receive a subpoena. The most important thing is not to confront the SEC directly or claim that they do not have jurisdiction. Instead, you should seek counsel and have them inquire about the agency’s concerns.

The safest path to disaster would be to talk to SEC officials without advice from an experienced securities lawyer. This could lead to self-incrimination and involuntary admissions of guilt.

Basically, the SEC is looking to determine whether your company should be registered, if it is dealing in what the SEC considers securities, or if it is somehow exempt from registration. As usual, anything you say during an interview with SEC staff could be used against you.

SEC Going After SAFTs

After careful consideration as to which companies are receiving subpoenas, a clear pattern emerges: the SEC is systematically targeting ICO projects working under the simple agreements for future tokens (SAFTs) framework.

Under this framework, issuers simply offer coupons for future tokens, that will be available when their cryptocurrency platforms are completed.

An anonymous source recently told CoinDesk:

“The SEC is targeting SAFTs. The new approach of the SEC is to consider tokens as both utility and security at the same time, meaning a token can bring utility to a platform but at the same time can be considered as a security if you sold it to parties that mainly looked for profit on its increase in value.”

The problem now is that SAFTs were largely thought to be on the safe side of securities laws. Now, the SEC is issuing 25-page subpoenas asking issuers for everything under the sun. At this point, the best investment you can make is securing representation from a top securities law firm.

What the cryptocurrency market needs is a regulatory framework that protects investors while enabling innovation.

The SEC’s recent enforcement actions against cryptocurrency fraudsters were meant to send a message. But the agency seems to feel that was not enough. We are living in a time of constant shifts in the regulatory space.

As the market evolves, regulators will try to keep up with it. and years will probably go by before we have a clear and determined framework in place to govern the digital tokens trade.

One thing is certain, the SEC subpoenas are going to keep coming, and companies should start preparing for them right now.

If you or your company are in the ICO and digital currency space the SEC says you must comply with their rules or face heavy sanctions. It’s a new area of law, filled with pitfalls for non-lawyers. Herskovits PLLC lawyers have 20 years’ experience representing people and companies facing SEC subpoenas. Call to learn your options.

Call 212.897.5410 or Connect Online

The SEC has repeatedly warned cryptocurrency investors about the market’s vulnerability to large-scale fraud. Likewise, the agency has made it clear that cryptocurrency offerings that function as securities will be treated as such, and thus subjected to scrutiny.

Since SEC officials began making emphatic statements about its jurisdiction over the cryptocurrency space, many companies have been sued in connection with their ICO dealings.

According to estimates, the SEC is looking into the affairs of at least 80 crypticompanies, in search of a variety of violations.

Among the companies whose alleged fraudulent dealings have been exposed by the SEC were:

• PlexCorps, a company that raised $15 million from investors lured by the promise of “the next decentralized worldwide cryptocurrency,” which the SEC believes they never even started developing.
• Maksim Zaslavskiy and the companies he used to sell REcoin, advertised as “The First Ever Cryptocurrency Backed by Real Estate.” Zaslavskiy told potential investors he had raised over $4 million, when in reality, he had only raised $300,000.
• The blockchain-based food review service Munchee and its MUN token. The SEC found evidence of false advertising on Facebook, promising “199% GAINS.”
• AriseBank, a company that claimed to have raised $600 million in an ICO, in its efforts to “revolutionize banking” via cryptocurrency. The SEC alleged the company misled investors about its true activities and intentions, and concealed from them the fact that one of its founders had a criminal record.
• Jon E. Montroll and his platform BitFunder.com. According to evidence introduced by the SEC complaint, Montroll misappropriated funds from users of the platform, stealing over 6,000 bitcoins.

But companies need not have incurred these type of violations to receive a SEC subpoena. The agency is currently making a sweeping effort to show it has jurisdiction over ICOs. It is looking for any companies that may be making misleading claims to attract investors, lying about the valuation of their assets or the amount of investor funds raised.

This should come as no surprise to players in the cryptocurrency space. The SEC has given ample warnings about its areas of concern.

A defense based on the argument that ICOs are not securities will not fare well in the current scenario.

Above all, companies developing and marketing ICOs need to be prepared to hear a knock on the door, compliments of SEC regulators. SEC subpoenas need to be taken seriously. Considering the shocking cases of fraud the agency has already exposed, where investors have been defrauded out of millions of dollars, its regulatory efforts and blanket probes are unlikely to stop.

Companies that receive an SEC subpoena or even an informal inquiry, must be ready to respond with crucial assistance from a cryptocurrency-savvy securities lawyer. A legal professional can obtain specific information as to what the SEC is looking at, and devise a plan to respond efficiently to any concerns regulators may have.

This is still largely uncharted territory for both regulators and cryptocurrency companies, and legal counsel is key to minimize risks.

Facing an SEC subpoena over ICO activities? Cryptocurrency firms should have an experienced securities lawyer interfacing with the SEC to avoid mischaracterization of their attempts to explain ICO related conduct. Herskovits PLLC focuses exclusively on securities law. Nationwide practice. Call 212.897.5410 or Connect Online

On March 19, 2018, federal prosecutors once again reinforced the notion that cryptocurrencies can be securities, as they upheld their certainty that ICOs offered by Maksim Zaslavskiy through his companies REcoin and Diamond Reserve Club, were in fact, securities, and thus, under the SEC’s jurisdiction.

As a criminal case relating to securities fraud in the ICO sphere, the complaint against Zaslavskiy and his companies has few precedents, but it may likely have many successors.

The defendant’s original response to his accusers, back in February, was that his ICOs were not securities, and thus he could not be charged with securities fraud.

Brooklyn prosecutors decided that calling an instrument a cryptocurrency does not exclude it from the SEC’s jurisdiction, and that its true nature must be determined by examining the “economic reality of the investments as they were advertised.”

After carrying out such an analysis, the Eastern District prosecutors determined REcoin and Diamond were ipso facto securities.

According to the SEC complaint, from July 2017 to March 2018, Zaslavskiy used his two companies to raise in excess of $300,000 from investors, “through various material misrepresentations and deceptive acts relating to supposed investments in digital ‘tokens’ or ‘coins’ offered, first by REcoin, then by Diamond, during the ICOs.”

The SEC claims the ‘tokens’ were “illegal offerings of securities,” which the company advertised as being backed by real estate for REcoin and by diamonds for Diamond Reserve Club.

Investors would supposedly see returns based on “(i) the appreciation in value of the investments Defendants would make, in the case of REcoin, in real estate assets, or, in the case of Diamond, in diamonds; (ii) the appreciation in value of the REcoin and Diamond tokens as the Companies’ businesses grew to the managerial efforts of teams of ‘experts;’ and (iii) the supposed increase in demand for the tokens,” the SEC said.

In order to market the ICOs, the defendants allegedly made several misleading statements, saying, for example, that they had raised millions of dollars for the ReCoin ICO, that they had a team of experts to decide on which diamonds and which real estate to purchase, to maximize returns for investors, and that the Diamond ICO would yield as much as 15% in returns from Diamond’s operations alone.

When the companies shut down, they told investors that the US government had forced them to do so, when in fact, according to Zaslavskiy’s own testimony, he “stopped the REcoin ICO because a token of the nature he had promised was ‘impossible to do.’”

“As the Supreme Court has recognized, Congress crafted a definition of ‘security’ sufficiently broad to encompass virtually any instrument that might be sold as an investment,” the SEC concluded.

Facing SEC scrutiny in a cryptocurrency or ICO (Initial Coin Offering) case? Herskovits PLLC is a New York based, nationwide law practice, focused on securities law. Experienced lawyers and great results. 212.897.5410 ORCONNECT ONLINE

In a commentary that appeared in the Wall Street Journal, Jay Clayton, chairman of the Securities and Exchange Commission, and J. Christopher Giancarlo, chairman of the Commodity Futures Trading Commission, referred to the new regulation scenario for cryptocurrency trading.

In fact, they expanded the concept to ”distributed ledger technology (DLT)” defined as “an array of new financial products, including cryptocurrencies and digital payment services.”

Emphasizing the potential of DLT as the “next great driver of economic efficiency,” the regulators made it clear that the SEC and the CFTC will focus on enforcing rules and ensuring market integrity to protect retail investors looking to invest in cryptocurrencies and initial coin offerings (ICOs).

While this market has offered many investors spectacular yields, it also involves great risks.

The authors of the article compared the boom of cryptocurrency trading to the 1990s dot.com boom, when a small portion of companies survived and only a few investors saw the spectacular returns everyone expected.

While neither the SEC nor the CFTC wish to hinder innovation, the regulators clarified that “transparency, investor protection and market integrity are critical to ensuring that innovation continues.” They expressed concern about “substantial DLT-related market activity that shows little or no regard to our proven regulatory approach.”

As cryptocurrencies reach a market capitalization of $700 billion, the regulatory entities are looking at offshore trading platforms, which are not registered with them, and thus free from scrutiny.

Cryptocurrencies vs Traditional currencies

As opposed to traditional currencies, cryptocurrencies have:

• No governance standards
• No oversight
• No sovereign backing
• No reliable trading reporting

Today, most investors purchase cryptocurrencies as an investment, rather than as a medium of exchange. Regulators advocate policy efforts to oversee the market as with any other financial instrument.

Platforms dedicated to trading cryptocurrencies are registered as payment services, thus, they are currently outside the CFTC´s and SEC´s range of action, but judging from the commentary by regulators, that may be about to change.

Today, some anti-money-laundering obligations do apply to cryptocurrency trading. But there is little federal oversight. A few recent examples illustrate how that may be beginning to change. Not too long ago, two large exchanges worked closely with the CFTC for listing Bitcoin products. Although this was not a requirement under current regulations, the companies “agreed to implement risk-mitigation and oversight measures,” giving significant access to the CFTC, which gained crucial oversight over the market.

On the other hand, the SEC has identified certain cryptocurrency products which are, in fact, securities. “The offer, sale and trading of such products must be carried out in compliance with securities law,” regulators stated, “The SEC will vigorously pursue those who seek to evade the registration, disclosure and antifraud requirements of our securities laws.”

When it comes to the ICO market, the SEC understands that it does have full oversight, and it has repeatedly made it clear.

In this respect, the SEC´s representative clarified that it doesn´t matter whether these securities are called “coins” rather than, for example, “bonds.” “We are disturbed by many examples of form being elevated over substance,” Clayton added.

As the CFTC and SEC promise to strive for transparency and integrity in these innovative markets, it is clear that prosecution of fraud will immediately follow. Individuals and entities who have gotten used to trading in the former no-man´s-land of Bitcoin and other cryptocurrencies should brace themselves, because things are clearly about to change, and regulators will go as far as Congress to make sure it happens fast.

Are you, or might you become, a target for SEC or CFTC regulators regarding cryptocurrencies? We can help. Call securities lawyer Rob Herskovits and learn your options. Nationwide practice – more than two decades’ experience. 212.897.5410 or CONTACT ONLINE

In line with its expressed intent to increase its oversight over the cryptocurrency market, the Commodity Futures Trading Commission has filed three related fraud suits in a single week.

The third lawsuit targets the creators of “My Big Coin,” who allegedly used $6 million dollars received from buyers to pay off early investors and shop for luxury items. The allegations caused the freezing of all assets belonging to the creators of the supposed next-big-cryptocurrency.

The Nevada-based company, My Big Coin Pay Inc.; was founded by Randall Crater. The suit, filed in January, also named one of its salesmen, Mark Gillespie. According to the allegations, between 2014 and mid-2017, the defendants defrauded 28 investors out of six million dollars.

There is nothing wrong with creating cryptocurrency and marketing it. But My Big Coin advertised its product as being accepted as widely as a Mastercard, gold-backed, and coveted in markets worldwide. In fact, according to the CFTC, My Big Coin wasn´t traded on any established exchanges and its prices were a mere fabrication.

Crater was not shy at marketing My Big Coin; he promoted it with YouTube videos and poor quality press releases, targeting perhaps a cash-thirsty, yet little-informed audience. Crater´s predictions that the price of My Big Coin would skyrocket were enough to convince some unwitting investors, including several based in Massachusetts.

The proceeds of My Big Coin sales were allegedly used by Crater´s family members to purchase real estate, collectible art, and other luxury items. Over half a million dollars were withdrawn from banks and ATMs. Several relatives of Crater were also mentioned in the suit.

In its complaint, the CFTC referred to My Big Coin´s promised results as “illusory,” and to the whole business as a “Ponzi scheme.”

The suit will likely have a sobering effect on a largely unregulated market. The CFTC´s Enforcement Chief, James McDonald, made this all the more clear in a statement:

“The CFTC is actively policing the virtual currency markets and will vigorously enforce the anti-fraud provisions of the Commodity Exchange Act… In addition to harming customers, fraud in connection with virtual currencies inhibits potentially market-enhancing developments in this area.”

Bitcoin´s price can rise astronomically; most spectacularly, it recently went from $1,000 to $11,000 over a short period of time. This attracts a lot of attention, and it can often inspire fraudsters to try to “make it big” with a made-up cryptocurrency marketed as “the next Bitcoin.”

But now the CFTC is watching.

The first time the Commission filed a cryptocurrency fraud suit was in September, 2017. Since then, the regulator´s quest for increasing oversight has only escalated, and it will, no doubt, continue to do so.

If you are facing a CFTC cryptocurrency action, it is important to act fast and prepare your defense – early intervention can make all the difference. However, if you are already embroiled in a CFTC battle, we can also help. The Herskovits PLLC team focuses exclusively on securities law defense and our cryptocurrency team is tracking the rules, the interpretations, and the realities for clients nationwide. Call now to learn your rights and options. 212.897.5410 or CONNECT ONLINE

At a recent Securities Enforcement Forum in Washington DC, Stephanie Avakian, co-director of the SEC’s Division of Enforcement, discussed the agency’s future priorities.

Avakian emphasized that the mission of the Enforcement Division, to protect investors, will remain unchanged, but she announced a slight shift in focus areas and resource allocation.

The Division of Enforcement official referred to retail investors as the “most vulnerable market participants,” and confirmed that the SEC will continue to focus on:

• Retail investors,
• Cyber-related issues,
• Misconduct by industry professionals and companies, financial fraud, disclosure issues relating to public companies, and insider trading.

After identifying these three focus areas, the top SEC official referred to the key role of data analytics in identifying threats to retail investors. “There are all sorts of ways to use technology to slice and dice data and apply analytics to look for all kinds of problems – by product, by investor type, by location, by sales or trading practice, by fee, you name it,” she explained.

For some analysts, the SEC’s explicit focus on protecting retail investors is a clear shift from the Obama era’s relentless pursuit of corrupt Wall Street heavyweights.

Avakian referred directly to the question whether a focus on retail implies allocating “fewer resources to financial fraud or policing Wall Street.”

In response to that interpretation, Avakian said, “The premise that there is a trade-off between ‘Wall Street’ and ‘Main Street’ enforcement is a false one,” emphasizing the SEC’s efforts to address misconduct by “institutions of all sizes.”

In terms of protecting retail investors, the SEC believes it can do much more than merely shielding them from “Ponzi schemes and microcap or offering fraud,” expanding the fraud category to include the following problems:

• Steering customers to mutual fund share classes with higher fees,
• Abuses in wrap-fee accounts,
• Investors buying and holding high risk products like inverse exchange-traded funds (ETFs) for long-term investment, including in retirement accounts,
• Failure to disclose fees, mark-ups, and other similar factors with a negative impact on returns,
• Churning and excessive trading that generate large commissions.

Avakian also classified cyber-related misconduct into three different types of violations:

1. Hacking to obtain nonpublic data to trade in advance of an announcement/event or to manipulate the market,
2. Using hacked brokerage accounts to conduct manipulative trading.
3. Using social media posts and other electronic publications to disseminate false information in order to manipulate stock prices

The SEC’s cyber unit will continue to focus on this type of cyber threats. Avakian also warned the industry about the potential consequences of cyber-related disclosure failures.

In the new scenario, cyber risks and cyber-security issues must be appropriately disclosed in SEC filings in order to avoid enforcement actions.

“We recognize this is a complex area, subject to significant judgment, and we are not looking to second-guess reasonable, good faith disclosure decisions,” Avakian clarified.

It remains to be seen how the SEC’s Retail Strategy Task Force will transform the SEC’s high goals into systematic action, and how effective the Cyber Unit will be in protecting investors from an increasingly complex array of cyber risks.

Financial professionals and industry firms now have more enforcement risks to anticipate. If you are an SEC enforcement target or simply need an analysis of policies and procedures, proactivity is the smart move. Talk to a Herskovits PLLC experienced securities lawyer to learn your rights and exposure. 212.897.5410