I. Overview
March 2023 included several important crypto-related enforcement actions and continued the trend of an active 2023 (which is showing no signs of slowing down in April). The Securities and Exchange Commission (“SEC”) brought an action to stop an alleged Ponzi-like crypto asset fraud scheme, charged eight celebrities for touting tokens without disclosing associated compensation, and continued to focus on actions involving allegations of unregistered crypto offerings.
The Department of Justice (“DOJ”) obtained a superseding indictment with significant new charges against Samuel Bankman-Fried as part of the ongoing legal actions concerning FTX’s operations, secured a three-year prison sentence against an individual who misappropriated customers’ funds, obtained guilty pleas from the operators of a crypto Ponzi scheme, announced an arrest in connection with the laundering of fraudulently obtained loans through cryptocurrency, and charged and extradited an individual allegedly involved in the OneCoin multi-billion-dollar international crypto pyramid scheme.
The Commodity Futures Trading Commission (“CFTC”) took the significant step of charging Binance, its founder, and its former chief compliance officer in an action with multiple allegations, which will certainly have reverberating effects in the crypto markets and likely impact the future of crypto-related enforcement.
II. SEC Crypto Enforcement Actions
A. BKCoin Management, LLC, et al. (February 23, 2023)
In a complaint dated February 23, 2023—announced on March 6—the SEC alleged that BKCoin, a Miami-based investment adviser, and its co-founder and former managing member Kevin Kang, engaged in a crypto asset fraud scheme involving Ponzi-like payments and personal use of investor funds. According to the SEC, BKCoin raised approximately $100 million from at least 55 investors to invest in crypto assets, but BKCoin and Kang used some of the money for other purposes and made related misrepresentations. (See Press Release).
BKCoin served as the investment adviser to five private funds, who are named as relief defendants in the complaint, and separately managed accounts for certain clients. While BKCoin raised money from investors between October 2018 and September 2022, BKCoin and Kang made representations through fund offering documents, investor agreements, and other communications that the funds would be used primarily to trade in crypto assets and BKCoin would generate returns through specific investment strategies focusing on crypto assets. BKCoin also circulated marketing presentations to some investors claiming that BKCoin or one of the funds received an opinion from a “top four auditor.”
According to the SEC, the statements made to the investors were misleading. In reality, BKCoin and Kang comingled investor assets and used approximately $3.6 million of the raised funds to make Ponzi-like payments to fund investors. BKCoin also transferred $12 million to a sixth crypto fund without a legitimate reason. The SEC also alleged that Kang personally misappropriated at least $371,000 of investor funds to pay for vacations, tickets to sporting events, trade crypto assets in his personal accounts, and to purchase an apartment in New York. Kang attempted to conceal the defendants’ unauthorized use of funds by sending altered documents with inflated bank account balances to the funds’ third-party fund administrator. Finally, according to the complaint, neither BKCoin nor any of the managed funds had received an opinion from any audit firm (let alone one a “top four” firm).
These charges were not necessarily a surprise, given clear signs of trouble with BKCoin. Towards the end of 2022, BKCoin suspended Kang from employment and notified its investors that it was suspending redemption requests and capital withdrawals from the funds. In October 2022, BKCoin filed an emergency petition seeking appointment of a receiver over the funds, which was granted. The SEC alleged that tens of millions of dollars that BKCoin raised have not been accounted for.
The SEC’s complaint charges defendants with violating §§ 17(a)(1)-(3) of the Securities Act, § 10(b) of the Exchange Act and Rule 10b-5, and §§ 206(1)-(2) of the Advisers Act. The SEC also seeks an officer and director bar and conduct-based injunction against Kang.
B. Green United, LLC, et al. (March 3, 2023)
On March 3, 2023, the SEC charged Green United, a Utah-based company, along with its founder Wright W. Thurston, and one of its promoters Kristoffer A. Krohn, alleging that the defendants defrauded investors in connection with an unregistered crypto asset securities offering. (See Press Release).
The SEC alleged that, between April 2018 and December 2022, Green United and Thurston raised more than $18 million through the sale of investments in so-called “Green Boxes” and “Green Nodes.” According to the SEC, Defendants falsely stated that these products mined a crypto asset called GREEN on a blockchain called the “Green Blockchain,” when in reality GREEN was not a mineable crypto asset and the Green Blockchain did not exist. Thurston allegedly created the supply of GREEN tokens through a smart contract on the Ethereum blockchain, and Green United distributed the tokes to investors’ wallets in order to create the appearance that GREEN was mined. In addition, Thurston recruited and paid commissions to Krohn, an SEC enforcement recidivist, who allegedly acted as an unregistered securities broker and made misrepresentations about the GREEN token’s present value and anticipated returns on investment.
According to the SEC’s complaint, Green Boxes and Green Nodes were investments that needed to be registered with the SEC. Defendants represented that Green United would leverage its expertise and resources to efficiently operate investors’ Green Boxes and Green Nodes, and distribute to each investor GREEN tokens earned through the mining operation. Defendants also allegedly led investors to believe that the GREEN token would increase in value as a result of Green United’s efforts to develop the Green Blockchain to create a public global decentralized power grid.
The SEC’s complaint charges Green United, Thurston, and Krohn with violating §§ 5(a) and (c) of the Securities Act; Green United with violating § 17(a) of the Securities Act and § 10(b) and Rule 10b-5 of the Exchange Act; Thurston with violating §§ 17(a)(1) and (a)(3) of the Securities Act and § 10(b) and Rules 10b5-(a) and (c) of the Exchange Act; and Krohn with violating §§ 17(a)(2) and (a)(3) of the Securities Act and § 15(a)(1) of the Exchange Act.
C. Justin Sun, et al. (March 22, 2023)
The SEC’s last March action was brought against crypto entrepreneur Justin Sun, three of his wholly-owned companies, and eight celebrities in connection with the offer and sale of alleged crypto asset securities Tronix (TRX) and BitTorrent (BTT). (See Press Release).
The SEC alleged that Sun and his companies, Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc. (formerly BitTorrent), offered and sold TRX and BTT as investments through unregistered “bounty programs,” which directed interested parties to promote the tokens on social media, join and recruit others to Tron-affiliated online communication channels, and create BitTorrent accounts in exchange for TRX and BTT distributions. Sun, BitTorrent Foundation, and Rainberry also allegedly offered and sold BTT in unregistered monthly “airdrops,” which refers to the distribution of crypto assets to certain recipients, purportedly without requiring them to pay cash consideration for the asset (recipients of BTT had to purchase and hold TRX to be eligible for BTT airdrops).
In addition to its charges related to registration, the SEC alleged that Sun engaged in a scheme to artificially inflate the apparent trading volume of TRX in the secondary market by directing his employees to engage in more than 600,000 wash trades of TRX between two crypto trading platform accounts he controlled.
The SEC also charged eight celebrities for touting TRX and/or BTT without disclosing that they were compensated for doing so and the amount of their compensation. Six of the charged celebrities (including Lindsay Lohan, Jake Paul, Ne-Yo, and Akon) settled with the SEC, and agreed to pay a total of $400,000 in disgorgement, interest, and penalties, without admitting or denying the SEC’s charges.
The SEC’s complaint charges Sun and his companies with violating §§ 5(a) and (c), as well as §§ 17(a)(1) and (a)(3) of the Securities Act (including an aiding abetting violation of § 17(b)); §§ 9(a)(1)-(2) and § 10(b) and Rule 10b-5 of the Exchange Act. The two celebrities who did not settle with the SEC are charged with violating § 17(b) of the Securities Act.
III. DOJ Crypto Enforcement Actions
A. U.S. v. Bankman-Fried (S.D.N.Y. March 28, 2023)
The legal troubles surrounding Samuel Bankman-Fried continued to grow in March, as the prosecutors added a Foreign Corrupt Practices Act charge against Bankman-Fried—who now faces a total of 13 criminal counts in connection with his operation of FTX—in a superseding indictment filed on March 28, 2023.
Bankman-Fried allegedly authorized and directed a bribe in the amount of approximately $40 million in cryptocurrency to Chinese government officials in November 2021. According to the indictment, the bribe payments were intended to influence the officials to unfreeze accounts worth over $1 billion in cryptocurrency belonging to Bankman-Fried, Alameda Research, and others. Bankman-Fried purportedly sought to regain access to the assets to fund additional Alameda trading activity.
B. U.S. v. Stojanovich (S.D.N.Y. March 2, 2023)
The first DOJ activity in March concerned Chet Stojanovich, who was sentenced on March 2, 2023 to three years in prison for defrauding victim customers of more than $2 million through fraudulent representations that Stojanovich would provide specialized cryptocurrency-mining computers (“miners”) and miner-hosting services. Instead, Stojanovich misappropriated customers’ money and did not provide them with the promised products and services. In classic fashion for many crypto fraudsters, Stojanovich spent the funds on personal expenditures, such as chartered flights, hotel rooms, limousines, and private parties. According to the DOJ, when six of Stojanovich’s customers sued him in a civil case, Stojanovich also lied under oath at a deposition and to the judge about the existence and location of electronic evidence in the case.
In addition to his prison sentence, Stojanovich was sentenced to three years of supervised release, forfeiture of $2,158,927, and restitution of $2,108,927. (See Press Release).
C. U.S. v. Rodriguez et al. (S.D.N.Y. March 8, 2023)
In yet another action against a crypto Ponzi scheme, the DOJ obtained guilty pleas from the operators and attorney of AirBit Club, a purported cryptocurrency mining and trading company. According to the DOJ’s press release, the defendants engaged in a scheme in which investors were induced to invest in AirBit Club based on the false promise of guaranteed profits, in exchange for cash investments in club memberships. The founders and promoters marketed AirBit Club as a multilevel marketing club and falsely represented to investors that AirBit Club earned returns on cryptocurrency mining and trading, and that investors would earn passive, daily returns on any membership purchased. Investors purchasing club memberships were provided with access to an online portal to view their purported returns and were shown fake “profits” accumulate in their accounts.
In reality, however, no mining or trading took place on behalf of the investors. Instead, the founders and promoters spent investors’ money on cars, jewelry, and luxury homes, and financed extravagant expos to attract more investors. Defendants attempted to conceal their scheme by requesting that investors purchase memberships in cash and by using third-party brokers. They laundered the proceeds of the scheme through several domestic and foreign bank accounts, including an attorney trust account managed by the attorney defendant, which was intended to maintain custody of the attorney’s law practice client funds. In a textbook example of malpractice, the attorney defendant used the trust account to direct investor funds to the personal expenses of himself and the other defendants, and funded promotional events for AirBit Club.
Defendants pled guilty to wire fraud conspiracy, money laundering conspiracy, and bank fraud conspiracy. As part of their guilty pleas, defendants have also been ordered to forfeit their fraudulent proceeds of Airbit Club of approximately $100 million.
D. U.S. v. Constant (S.D.N.Y. March 20, 2023)
Coindawg founder Charles Riley Constant was arrested on March 22, 2023 in connection with an alleged scheme to steal and launder over $1 million in fraudulently obtained loans from the Small Business Administration (“SBA”), which included using fraud proceeds to purchase cryptocurrency ATMs. (See Press Release).
According to the DOJ’s unsealed complaint, Constant knowingly assisted others in a scheme in which perpetrators used false identities and non-existent companies to obtain loans from the SBA, proceeds of which were transferred to an entity owned by Constant. Constant then used $700,000 of the loan proceeds to purchase bitcoin from a New York-based exchange and directed the exchange to distribute the bitcoin to his co-conspirators. Constant allegedly stole the remaining portion of the loans and used it to purchase, among other things, seven cryptocurrency ATMs, cryptocurrency, and promotional services to start a cryptocurrency ATM business named Coindawg LLC. The DOJ alleged that Coindawg has exchanged over $3,000,000 worth of cryptocurrency.
The DOJ’s indictment charges Constant with one count each of conspiracy to commit money laundering, theft of public money, and interstate receipt of stolen money.
E. U.S. v. Dilkinska (S.D.N.Y. March 21, 2023)
On March 21, 2023, the DOJ announced charges against Irina Dilkinska, who was extradited from Bulgaria, in relation to her participation in a major crypto fraud scheme. According to the superseding indictment, Dilkinska helped to operate an international fraud scheme involving the sale of a purported cryptocurrency, called OneCoin, by managing the scheme’s proceeds and making false statements and misrepresentations to solicit individuals throughout the world to invest in OneCoin. OneCoin was described by the DOJ as a fraudulent pyramid scheme through which members received commissions for recruiting others to purchase cryptocurrency packages. Over three million people invested in the packages and OneCoin generated €4.037 billion in sales revenue between 2014-2016 alone.
As the purported Head of Legal and Compliance for OneCoin, Dilkinska allegedly used her position to create and manage shell companies—in cooperation with a former equity partner at an international law firm—to launder approximately $400 million in OneCoin proceeds and hold property belonging to Ruja Ignatova, the co-founder of OneCoin known as the “Cryptoqueen,” who was separately charged in 2017 and added to the FBI’s Top Ten Most Wanted List. The DOJ charged Dilkinska with one count of conspiracy to commit wire fraud and one count of conspiracy to commit money laundering. The press release also sought information from the public about Ignatova’s whereabouts.
IV. CFTC Crypto Enforcement Actions
A. Binance, et al. (N.D. Ill. March 27, 2023)
Perhaps the most important enforcement update in March related to the civil charges brought by the CFTC against three entities that operate Binance (together, “Binance”), currently the world’s largest crypto exchange, Binance’s founder Changpeng Zhao, and its former chief compliance officer Samuel Lim. (See Press Release).
According to the CFTC’s complaint, a significant portion of Binance’s trading volume and profitability comes from customers located in the U.S., who use the Binance platform to enter into different types of digital asset spot and derivative transactions involving bitcoin, ether, and litecoin. The CFTC alleged that despite publicly stating its intent to block or restrict U.S. customers from accessing its platform, Binance has taken a “calculated, phased approach” to increase its U.S. presence by soliciting retail customers, employing U.S. personnel and vendors to cultivate certain commercially valuable “VIP” customers—including institutional customers—located in the U.S.
The press release highlights several noteworthy allegations that shed light on the CFTC’s enforcement priorities and strategy, as well as the magnitude of the legal challenges facing Binance. First, the CFTC alleged that Binance did not require its costumers to provide any identity-verifying information before trading on the platform, despite having the duty to do so due to its functioning as a futures commission merchant (“FCM”). The three operating entities were charged with failing to diligently supervise Binance’s activities as an FCM. As part of supervisory failures, the CFTC highlighted that Binance instructed its employees to communicate with U.S.-based customers about control evasion through the messaging application Signal, which has an automatic deletion functionality for written communications. Second, Binance allegedly failed to implement compliance procedures designed to prevent and detect terrorist financing and money laundering. Third, the CFTC alleged that even after purporting to restrict U.S. customers from trading on its platform, Binance instructed its customers, especially its U.S.-based VIP customers, on the best methods for evading Binance’s compliance controls. For example, according to the complaint, Binance left open a loophole for customers to use the platform without submitting to any Know Your Customer procedures as long as the customer withdrew less than the value of two bitcoin in one day. Fourth, the CFTC argues that Binance acted as a designated contract market or swap execution facility without registering with the CFTC. Fifth, Binance, Zhao, and Lim are charged with willful evasion of the requirements of the Commodity Exchange Act (“CEA”), due to activities designed to avoid CFTC regulation.
The CFTC alleged that Zhao is liable for Binance’s violations due to his ownership and control over the entities that operate Binance. In addition, Lim is charged with willfully aiding and abetting Binance’s violations, and conducting activities to willfully evade applicable provisions of the CEA, including promoting ways to assist customers in circumventing Binance’s controls, and implementing a corporate policy that instructed U.S. customers to use virtual private networks and create accounts through off-shore shell companies to evade controls. As part of its action, the CFTC is seeking disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the CEA and CFTC regulations.
Given Binance’s prominence in the crypto space, especially in light of the FTX fallout, we will be watching any developments in this case closely.
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This post is part of the Debevoise Fintech Enforcement team’s monthly round-up of recent developments. For any questions or inquiries, please contact FintechEnforcement@debevoise.com.
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