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SEC Freezes $8M in Assets in Alleged Fraudulent Token Offering Scheme (sec.gov)
79 points by Dowwie 12 days ago | hide | past | web | favorite | 66 comments
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> 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-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.


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.


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.


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.


Does that imply that he was 16-17 old minor at the time when the crimes were committed?

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.

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.


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.


> I said "accusing" and not "charging" for good reason.

Thats not the issue, its just not embezzlement.

I'll debate the finest points of embezzlement with you. They accept that people gave him money for the widest discretion of use, like in every other token sale, or securities offering, so "embezzlement" is impossible. They don't like that it was unregistered, and if it was a registered offering there would have liked disclosures that contradicted his statements.

The only similarity to embezzlement is that the agency is trying to recover a fraction of money on behalf of investors.

Yes, his moving the funds was the impetus for the complaint, we don't disagree there.


I wasn't debating, I was explaining. I'm a securities attorney so I'm quite familiar with the "finest points" of federal securities laws.

Embezzlement isn't a word mentioned in the complaint, and not paragraph 6, embezzlement has a specific meaning in federal criminal law. Why are you being so familiar in one area, and using hyperbole in another? Perhaps I misunderstand:

Do you think embezzlement is a charge something the SEC will refer to the DOJ as well, or are we still unproductively debating semantics. If not semantics, which particular action do you consider embezzlement? The moving $2,000,000 upon notice of a potential charge? The actions in Paragraph 6 of selling something to an using the revenue to pay employees, debts and personal things? You make it seem like its just an accounting nuance, as if he should have paid himself a greater salary from company coffers to then pay for personal things.


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

If they actually crack down what would be left? I mean other than my boy Dentacoin naturally haha.

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.


Something about a firehose of money given on the flimsiest of prospectus seems to cause fraud. Can't think why.

The token scheme space?

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.


> This is true for any rational investor.

> These sorts of regulations only exist to keep reckless people from losing money.

No. It's not. You're barred from investing in fly-by-night scams unless you have more than enough money to do so comfortably. If a poor person, who is naturally desperate to make money, is conned by a snake oil salesman, you know who pays? Literally everyone. They end up on the social safety net collecting on our taxes. As such the public has an interest in making sure, to a reasonable extent, that only those capable of taking huge financial risks do so.

Now if your company is established enough to provide the required quarterly disclosures by SEC regulations, sweet. Anyone can invest their last penny. Seems like a fair place to draw the line.

> That is not a valid reason to block the freedom of genuine investors.

I agree, if you mean a "genuine investor" has over $1M in assets excluding their primary residence or a previous years income in excess of $200K and an expectation they will have the same in the coming year.

Accredited investor rules weren't brought in because too many poors were hitting it big and all those new yachts were clogging up Boston Harbor. Literally because not having them caused the great depression. And they didn't call it that because it was just a pretty good depression, ya know.


FYI: The house has unanimously passed a bill to update the definition of accredited investor to include professionals in the given industry. For whatever reason, the Senate didn't take any action.

https://www.govtrack.us/congress/bills/115/hr1585


Sounds pretty rational to me.

The cryptocurrency boom has been people painfully re-learning why we have these regulations in the first place.

>"We don't need no government regulators!"

Gets frauded

>"Where were theeeyyyy to save us?!"


Literally though.

> Regulations are bad!

gets defrauded

> HELP POLICE! SEC! FTC! DOJ! How was this permitted in the first place?! Where was the government when we needed them!

Privatized gains, socialized losses.


Turns out the government does actually protect people in first-world countries in ways we simply take for granted... Huh who woulda thought!

You can make this joke, and there are hypocrites of this particular type, but that isn't actually an argument for more regulation.

Indeed, speedrunning the history of finance from prehistoric times to present.

I don't think providing welfare should outweigh a citizen's freedom to exercise his or her own judgement. If it's between those two, don't give welfare. You may disagree, but this is a valid point of view.

> you know who pays? Literally everyone. They end up on the social safety net collecting on our taxes.

That is an imaginary scenario, not a real societal problem. I don't know of anyone collecting welfare because they lost their money in a crypto scheme, or a ponzi scheme, or bad investments. But I know of lots of people on welfare for other reasons.

> Seems like a fair place to draw the line.

This kind of language is just fluff to make your argument seem more appealing. I don't think it's a fair place to draw the line.

> Now if your company is established enough to provide the required quarterly disclosures by SEC regulations, sweet. Anyone can invest their last penny.

That is not accurate, the SEC blocks tons of legitimate stuff even from accredited investors, such as bitcoin ETFs.

> Literally because not having them caused the great depression.

As far as I am aware, this claim is 100% unsubstantiated. There are some good and bad theories about the great depression, but this isn't one I've heard before.


Wait, so the government shouldn't shut down fraudulent investment schemes because it is your right to invest in scams?

The government doesn't know what is and isn't a fraudulent investment scheme.

Sometimes they err in either direction: claiming something is fraud when it isn't, or claiming it isn't fraud when it is.


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

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

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."


"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."

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.

Innocent beginnings? It sounds exactly like he planned to commit securities fraud by preying on one of the world's most vulnerable populations. And if what commenters below are saying is correct, that he continued to move money around even after being directly ordered not to by the SEC, he is a particularly stupid and/or arrogant con man.

The only possibilities cryptocurrency has ushered in are new ways to scam people. Or rather, digital versions of old scams. Involvement in cryptocurrency should be prima facie evidence of fraud.


> Innocent beginnings? It sounds exactly like he planned to commit securities fraud by preying on one of the world's most vulnerable populations

What sounds like securities fraud about that original idea?


The reasons folks would or would not be able to trade is:

(0) Having money to invest.

(1) Access to the internet.

(2) Being able to afford the transaction fee.

(3) Being on a list of people who can't trade like OFAC or failing AML/KYC, or being underage.

The only one blockchain addresses is (3): granting access to people who aren't permitted to trade. Every single other thing is either a social problem, already a solved problem or can easily be addressed without the magic of the blockchain.


Or being someone without access to a bank account, or without proper means of identifying yourself. Which applies to a substantial number of people in Africa.

Are you sure? How much do you know about banking in Africa? I know that I personally don't know much, which is why I don't offer solutions -- but what I do know is that services like Flutterwave and M-Pesa [2] are absolutely killing it.

[1] https://money.cnn.com/2017/07/31/technology/business/flutter...

[2] https://www.forbes.com/sites/tobyshapshak/2018/11/27/how-mob...


Those businesses are succeeding exactly because of the lack of banking/identification access in Africa. They use phones as the axis of identity, which people do have (somewhat) ubiquitous access to. However that doesn't make it easy to access the US stock market, which is why this guy's concept would have been useful to them.

You can't access the US stock market without SEC regulation thanks to the Securities and Exchange Act of 1934. No amount of blockchain is going to change that.

According to US law, you mean. However, nothing stops a foreign entity from creating derivatives pegged to the price of US stocks. Which is exactly what this guy was attempting to do.

Owning stock conveys beneficial ownership share, pays dividends, etc. This is strictly worse.

Worse than what? Their alternative is owning nothing at all. And derivatives are just fine - they can be pegged to the dividend adjusted value of the asset.

It's not an investment, it's gambling. I'd suggest that's probably not the best use of capital for what you identify as an impoverished group.

How exactly is a single-stock future any more gambling than investing in that stock directly?

>sell shares reflecting the US stock market. The idea was to globalize investing by tokenizing shares.

If it's not immediately apparent that this means the sale of unregistered securities, I'm not sure what to say. The SEC would seem to agree.


Which part of that is fraud?

All of it?

You think that selling an unregistered security is fraud?

I think the kind of people who sell unregistered securities are fraudsters.

Except selling unregistered securities is not fraud. Which is why I asked "Which part of that is fraud?".

Who can and cannot invest comes down solely to regulations. None of which would disappear just because someone sprinkled the magic of blockchain onto stocks.

This is one of the common refrains, and frankly, it's myopic at best. Just because the blockchain says you own some stock or property doesn't change the fact the government ultimately regulates what you have and if the blockchain diverges from the government's view on what's permitted guess which one wins?

If the blockchain says a car is registered to me and I fail to pay my bills, guess who wins, your multi-player Excel spreadsheet cell or my tow truck?


US stock markets are already open to global investors...

Teens in subsaharan Africa.

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.

> 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".


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.

I'm not arguing for a blockchain solution here, fwiw.

Just pointing out that people under the age of majority are, in fact, restricted from trading securities (for obvious reasons).


Ah, you're probably right there. Okay, people of the age of majority in sub-Saharan Africa can own stock.

I did mean "most Americans", not most teenage Americans. I think OP was probably making a point about access to resources and markets, not age related legislation.


The US does not have age limits on stock ownership.

while true, most brokerages have age limits on executing transactions (which effectively results in the same thing)

Why can't someone build a non-blockchain Robinhood-style brokerage allowing teens in subsaharan Africa to buy stocks?

most brokerages i think wouldn't touch underage trading with a 10-foot pole, for obvious reasons.

TNAB?

The North American Bitcoin conference. Still a great yearly conference



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