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District Court says ‘Request Denied’ to the SEC

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Coming up Empty?

As the upcoming deposition involving Telegram CEO, Pavel Durov, looms, the SEC felt it prudent to request the disclosure of full banking records.

This request, which was taken into consideration by presiding Judge, P. Kevin Caste, has now been reviewed and denied – to an extent.

A Middle Ground

While the request for full disclosure was denied, Telegram was not completely let off the hook.  In the Court’s statement it is indicated that the company will, indeed, need to prove compliance with foreign data privacy laws.

The following is an excerpt from the ‘Order of Motion to Compel’.

“The Court denies, without prejudice, plaintiff’s application to compel the production of defendant’s bank records…By January 9, 2020, defendant shall set forth in a declaration a proposed schedule for a review of the requested bank records to ensure that production of such records complies with foreign data privacy laws.”

The Request

As the situation has continued to develop between the SEC and Telegram, the former felt as though these records were pivotal in making their case;  A case which purports that Telegram performed the unregistered sale and distribution of securities.

In their initial plea to the Court, in an effort to release Telegrams banking documents, the regulatory body stated,

Without fully un-redacted bank records…the SEC (and the Court) cannot fully understand (1) who made payments under which purchase agreement, (2) whether some of those payments were from entities who were acting as statutory underwriters, and (3) whether Telegram made any payments to such underwriters.”

Unfortunately for the SEC, they will now need to make their case against Telegram without this information.

Commentary

As many are, Philip Moustakis of Seward & Kissel LLP, former Senior Counsel at the SEC, is closely following this situation.  He recently took the time to comment, and share his thoughts on these developments.

Philip Moustakis stated,

“The SEC’s letter motion and Telegram’s response, taken together, indicate there is a disagreement concerning the facts and circumstances of Telegram’s offering to which the bank records the SEC seeks likely would be highly relevant. And though the court’s order denies the SEC’s request for bank records, it does so without prejudice, not on relevance grounds, but rather for Telegram to propose a schedule for their review to ensure their production complies with foreign data privacy laws, a concern raised by Telegram.”

He continued,

“One of the factual disputes in the case centers on whether Telegram complied with the requirements of Regulation D in its offer and sale of “Purchase Agreements for Grams.” The SEC alleges Telegram offered and sold Purchase Agreements in a manner that did not comply with Regulation D and failed to exercise reasonable care to assure that purchasers of the Purchase Agreements were not acting as statutory underwriters. The SEC alleges Telegram not only failed to take reasonable care, it actually paid others on a commissions-basis to resell the Purchase Agreements. Telegram argues that, at most, Defendants paid certain non-U.S. persons a finder’s fee for helping to introduce Telegram to other non-U.S. investors. Another factual dispute, of course, is whether the Grams themselves are securities. I would be surprised if the court did not require Telegram to turn over the bank records the SEC seeks once the data privacy issues are addressed.”

*To learn more about Philip Moustakis and his past experiences, make sure to peruse our recent exclusive interview with him HERE.*

Deposition

The long awaited deposition of Pavel Durov is expected to commence later this week.  During this event, it is expected that the CEO of Telegram will shed light on, not only their actions leading up to the SEC’s intervention, but their intent.

The purpose of this event is to shed light, and gain insight, into the chain of events pre-trial.  This testimony, given under oath, can then be used for all parties to build their respective cases.

In addition, Pavel Durov will be joined in the deposition of Telegram by the company’s VP, Ilya Perekopsky, and employee Shyam Parekh.

Naturally, all eyes will continue to be on this situation as it continues to develop, as the results stand to hold industry wide ramifications.

Telegram

Founded in 2013, Telegram operates out of Dubai.  The company has developed a popular messaging app that looks to rival other popular platforms, such as Discord and WhatsApp.

CEO, Pavel Durov, currently oversees company operations.

SEC

The Securities and Exchange Commission is a United States regulatory body.  The outfit is tasked with creating and enforcing fair and transparent markets surrounding securities.  This is achieved through monitoring, and the enforcement of, compliance measures upon all industry participants.

Chairman, Jay Clayton, currently oversees operations at the SEC.

In Other News

When news first broke of the request for banking records, days ago, the team at Telegram publicly commented, referring to the development as a ‘fishing expedition’ on the part of the SEC.  With the Court’s decision now siding in favour of Telegram, it would appear as though the SEC will be going home hungry, for now, with no fish to be had.

Telegram Likens SEC Request to a ‘Fishing Expedition’

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Joshua Stoner is a multi-faceted working professional. He has a great interest in the revolutionary 'blockchain' technology. In addition to this, he is a licenced Paramedic in Nova Scotia, Canada. As such, he can provide emergency care/medicine to any situation necessitating it.

Regulation

XRP Ripple Lawsuit re-filed, but not as a Security?

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Ripple XRP Lawsuit

This week, news broke that an amended complaint against Ripple has been filed by XRP investors. This news is the latest development in a two-year class-action lawsuit brought against the firm. Interestingly, investors chose to amend this lawsuit in order to add protections in the case that XRP doesn’t fall under securities regulations.

Importantly, the amended suit includes former XRP investor Bradley Sostack as the lead plaintiff. In this go-around, the plaintiffs brought additional claims against Ripple and its CEO, Brad Garlinghouse for violation of California business law. The report alleges the company blurred the differences between its enterprise solutions and XRP to further drive demand in the market.

Hedge Your Bets

Originally, the lawsuit alleged that Ripple raised millions of dollars through the unregistered sales of XRP to US retail investors. Now, according to a court document filed on March 25, investors decided to attempt another approach. Perhaps, fearing that XRP could escape securities regulations, the new suit goes after the firm for violations of California business laws.

To this extent, the sixth claim for relief states that the firm participated in false advertising, while a seventh claim, further accuses the firm of unfair competition in violation of California regulations. Also, the claim states that Ripple reportedly limited the supply of XRP to drive price appreciation.

Garlinghouse Under Fire

Specifically, the allegations claim that Garlinghouse made numerous conflicting claims to investors. In multiple instances, he stated that he was holding XRP for long-term gains. However, researchers pointed out that these statements were false. Throughout 2017, Garlinghouse sold millions of XRP via cryptocurrency exchanges. In fact, a review of the XRP ledger indicates that Garlinghouse sold over 67 million XRP in 2017 alone. Additionally, on multiple occasions, he dumped his XRP within days of receiving it from Ripple.

XRP Ripple Lawsuit

XRP Ripple Lawsuit

SEC vs Ripple XRP

The lawsuit cites statements made from Ripple about XRP being a utility token essential for international payments. Additionally, the firm and CEO made statements in which they described the cryptocurrency sales are primarily to market makers. This last point could prove to be a major problem for Ripple as 60 percent of XRP is owned by Ripple, and until now, only saw use solely for fundraising efforts.

The Ripple XRP Saga

The XRP securities saga started when a group of disgruntled investors lodged a complaint with the SEC back in 2018. Since that time, the case has seen numerous amendments as both Ripple and the plaintiffs adjusted their strategies. Ripple hoped to get the case dismissed early on,  but U.S. District Judge Phyllis Hamilton in the Northern District of California ordered in February the suit could proceed to trial.

While the news did seem bleak for Ripple, at that time, Judge Hamilton also stated that the company did not violate California state law. Consequently, both the false advertising and personal liability against Ripple’s CEO Brad Garlinghouse were dropped in that instance.

Now, Ripple worries that the plaintiffs will utilize unlimited amendments to falter the XRP market. Given the new legal approach that the plaintiffs have taken to towards the company, there may be some validity to their concerns.

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Regulation

BSTX Experiences Proposal Delay, as SEC Seeks Further Commentary

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Postponed

The SEC has recently released an update on a proposal put forth in 2019 by the, yet-to-launch, Boston Security Token Exchange (BSTX).  Despite being considered since last May, the proposal has been postponed.  The purpose of this delay is to allow for public commentary.

Final Decision

This move, delaying the final decision, comes after months of deliberation on the proposal put forth by the BTSX.  From the time of the initial filing, we have covered developments surrounding the BSTX on multiple occasions.  The following articles shed light on this timeline, and what the BSTX is trying to achieve.

Boston Security Token Exchange (BTSX) Seeks SEC Rule Change

SEC Seeks Input on ‘Boston Securities Token Exchange (BSTX)’ Proposal

Changes Proposed

While not all-encompassing, the following are a few of the key points put forth by the BSTX in their proposal for change.

  • Asset ownership recorded using a private blockchain
  • Trading enabled through use of BSTX tokens
  • Whitelisted Clients

Commentary

In their most recent extension, the SEC noted that it was done in hopes that the public would come forth, and share their stances towards the proposal.  They stated,

“The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the issues identified above, as well as any other concerns they may have with the proposal.”

Expressing Trepidation

Presumably, what prompted this delay is multiple responses received during the first commentary period.  While there were only two received, each expressed trepidation towards what the BSTX is trying to achieve.

Of the two responses received, thus far, one was received by a representative of Nasdaq.  It is stated,

“Nasdaq respectfully submits that the BOX proposal may place an unreasonable burden on competition because the blockchain (ledger) technology used to track ownership of the security token—the only aspect of this instrument that is unique—would not have a common distributed ledger. Rather, the distributed ledger would be exclusively available on BOX, thereby placing other exchanges at a competitive disadvantage that cannot be remedied by replicating the blockchain offering. Furthermore, the proposal appears to provide insufficient detail regarding: (1) digital securities infrastructure and technology pairing with the existing equities market infrastructure, and (2) its impact on the anti-fraud and customer protection provisions of the Act, as well as possible investor confusion. Nasdaq recommends that BOX submit additional detail addressing these concerns before the proposal is approved.”

Simply put, they break down their issues into two main points:

  • ‘The Proposal places an unreasonable burden on competition’
  • ‘The Proposal provides insufficient information to assess compliance with the Act or the costs to market participants.’

The commentary, put forth by Nasdaq, closes with a request for more information, stating,

“For the reasons described above, Nasdaq believes that BOX has provided insufficient information concerning the proposal’s impact on competition, how it complies with other aspects of the Exchange Act and Anti-Money Laundering statutes, and how BOX intends to avoid investor confusion. Nasdaq recommends that BOX submit additional detail addressing these concerns before the proposal is approved.”

Boston Security Token Exchange (BSTX)

Founded in 2018, the BSTX is a joint venture between BOX Digital, and tZERO.  The goal of the BSTX is to establish a regulated and full-fledged exchange, which offers support for digital securities.

CEO, Lisa Fall, currently oversees company operations.

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SEC Levies Various Charges Against ‘Teshuater’

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Halt!

The SEC has recently laid charges on yet another fraudulent company, which robbed investors of funds through a variety of means.

The charges laid are against a group of entities, which include:

  • Teshua Business Group
  • Teshuater
  • Larry Leonard
  • Shuwana Leonard

It is believed that the couple, Larry and wife Shuwana, used his standing as a former Texas Pastor, to prey specifically on the African-American community.

Alkaline Water

Over the past few years, and most prominently during the 2017 ICO boom, we have seen various projects touting their unique nature.  While everything from maple syrup, to lost treasure, has been touted as value backing for coins, one of the more ridiculous is Alkaline Water.

It is this Alkaline Water, which much of the fraud to have taken place, was based upon.  The Leonards’ touted their Alkaline Water company as being the first of its kind to be ‘black owned’.  They then attempted to raise money by selling stock, selling non-existent ‘TeshuaCoins’ purportedly backed by their reserve of water, and under the guise of a yet-to-be established BTC mining outfit.

Even if this entire endeavour was legitimate in their efforts to raise money, the underlying product is basically snake oil; A product with no proven benefits was being peddled as an asset of value.

Big Money

Over the course of their journey, preying on unsuspecting investors, money was stolen through various means.

There were three main streams of income for the couple behind TeshuaCoin.

  • Capital generation through an ICO
    • $170,395.20 was raised out of a $20 million goal
  • Selling fake equity within Teshuater
    • Nearly $291,044.07 was raised through the issuance of fraudulent ‘stock certificates’
  • Investments for establishing a mining pool
    • $25,544.96 was stolen, with zero effort to establish said pool

Charges Laid

Naturally, as the fraud committed was not done so in a singular manner, there are various charges being laid against the couple and their group of companies.

These charges revolve around each of the aforementioned three ways that they decided to defraud investors.  Per their filing, SEC is seeking the following:

  1. Permanent injunctive relief
  2. Disgorgement of ill-gotten gains plus prejudgement interest thereon
  3. Civil penalties
  4. Equitable and ancillary relief to which the Court determines the Commission is entitled

Commentary

In their filing, the SEC summarizes the result of efforts made by Larry Leonard, Shuwana Leonard, and their companies, to defraud investors.

“Since at least 2017, Larry Leonard, individually and through Teshuater and TBG, along with his wife, Shuwana Leonard, targeted investors in the African-American community by promising oversized returns on various investments related to Teshuater, a business that bottled and distributed alkaline water. During the course of this scheme, Defendants raised nearly $500,000 from over 500 investors through materially false and misleading statements and omissions and other deceptive conduct.”

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