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.”
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.
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.”
“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.*
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.
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.
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.
After Months of Silence by ICOBox, the SEC Seeks ‘Default Judgement’ and ‘Permanent Enjoinment’
Beginning roughly 4 months ago, the SEC set their sights on ICOBox, and actions taken by the company and its founder throughout 2017. The SEC states,
“ICOBox, an incubator for digital asset startups, was founded in mid-2017 by Evdokimov, its CEO and “vision director”. To raise funds, defendants sold approximately $14.6 million worth of securities in the form of digital assets called “ICOS” tokens. Between August 9, 2017 and September 15, 2017, defendants sold ICOS tokens to over 2,000 investors, in the United States and globally…By not registering the offering with the SEC, defendants violated the securities laws’ registration requirements”
Unfortunately, despite being made aware of the various charges laid against them, the SEC and Courts have been met with nothing but silence.
The aforementioned lack of response has led to the recent developments, to be discussed here today. By failing to respond to the SEC’s filing, in September of 2019, ICOBox and its Founder, Nikolay Evdokimov, have essentially forced their hand.
Backed into a corner by the silence demonstrated by ICOBox, the SEC has filed for a ‘default judgment’ on their accusations of alleged securities violations. Simply put, a ‘default judgement’ refers to a ruling put forth by a Judge, when presented with a case where the defendants remain absent from the proceedings without valid reasoning.
While there existed the possibility of defending their actions, should a default judgement be awarded, ICOBox essentially forfeits this right.
While a default judgement is being sought, the SEC has not stopped there. In their recent filing to the courts, the SEC attempts to build a case, which demonstrates the intimate nature between ICOBox and its founder, Nikolay Evdokimov.
The SEC hopes to show that Evdokimov was, not only the face of the company both internally and externally, but that he had a direct hand in the actions undertaken by ICOBox.
In doing so, the SEC hopes for the court to award a ‘permanent enjoinment’ of, both, the company and its founder. A ‘permanent enjoinment’ refers to a court enforced prohibition of certain activities imposed upon specific entities – in this case, ICOBox and Evdokimov.
When this saga first began, in September of 2019, we reported on the initial steps taken by the SEC. The allegations raised by the regulatory body, at that time, are only now coming to an end, as they look to close out the case and move on.
Requests of the Court
In their filing, the SEC elaborates on the various infractions committed by the company and its founder. They proceed to list various suggested/requested actions to be taken by the court against the defendants. The following are a few examples of their requests.
- ICOBox and Evdokimov should be permanently enjoined
- The Court should order joint and several disgorgement with prejudgment interest
- The Court should order second tier penalties against Evdokimov
- Default Judgement Should be Entered Without Delay
Launched in 2017, ICOBox was a service provider for companies looking to host token based capital generation events, such as ICOs and STOs. Since their inception, ICOBox has helped its clients raise over $650M, in addition to raising over $14M in funds through their very own ICO.
Company operations were overseen by Founder, and CEO, Nikolay Evdokimov.
In Other News
While every case surrounding illegal activity brought forth by the SEC is an important one, there are two, in particular, that have found themselves creating headlines in recent months. These would be the situations developing around, both, Ripple and Telegram. Each of these companies have been accused of actions violating existing securities laws. On various occasions we have covered these events as they develop. To learn more about these on-going cases, make sure to peruse the following articles.
Qatar Bans All Cryptocurrency in QFC
In a surprising turn of events, The Qatar Financial Centre (QFC) announced that it would ban all cryptocurrency-related activities within the sector. The news comes as a shock as Qatar has was seen as a leader in terms of blockchain adoption in the region. Now, government officials are voicing concerns over money laundering and terrorist financing as a means to stifle local crypto activities.
News of the crypto ban came via a report by the Qatar Financial Centre Regulatory Authority (QFCRA). In the now-infamous report, the QFCRA stated that all services involving cryptocurrencies are now illegal within the exclusive economic zone. Specifically listed in the report are critical components to the market. These components include crypto to crypto trades and crypto to fiat exchanges. Also, the report directly lists virtual asset services including those that facilitate the trading, custody, and issuance of virtual assets in any form or manner.
Security Tokens Safe
Interestingly, the report doesn’t ban security tokens. In fact, these unique financial instruments remain unaffected by the new legislation. The report states that financial instruments regulated by the QFCRA, the Qatar Central Bank, or the Qatar Financial Markets Authority are exempt from the ban. This makes sense from Qatar’s standpoint because these tokens undergo full AML and KYC verification.
Discussing the decision, Sheikh Abdulla bin Saoud Al-Thani, the governor of Qatar’s Central Bank pointed to a few key points as to why the regulations make sense. He stated that a correlated effort needed to be put forth to combat money laundering and terrorist financing. He believes that only a stricter and effective regulatory and legislative framework can accomplish this task.
It appears as if this latest maneuver is actually just a part of Qatar’s overall new approach towards combating money laundering. Recently, the country instituted wide-sweeping AML legislation. All of these laws seek to curb those attempting to hide money from the government.
The Qatar Financial Centre – QFC
The QFC is a special jurisdiction within the country designed to spur economic growth. Companies that call the QFC home get access to a host of exclusive benefits. These benefits include reduced legal, business, tax, and regulatory infrastructure. In this way, Qatar seeks to attract businesses and facilitate economic development moving forward.
Tighter Regulations Globally
Qatar’s decision to add more regulations to the crypto sector mirrors that of numerous other countries. Just recently, US lawmakers proposed new legislation to bring much of the crypto market under the jurisdiction of regulators. If the new bills receive approval, there would be wide-sweeping implications for the industry.
Additionally, EU Lawmakers have come up with new legislation as well. On January 10th, 2020, the European Union (EU) will initiate the Fifth Anti-Money Laundering Directive (5AMLD). This new law requires that all digital asset platforms and even wallet providers verify and record customer identities.
Qatar Steps Backwards
As Qatar attempts to gain more control over the use and trading of digital assets within its border, it may find that these new regulations have an adverse effect. Cryptocurrencies, many of which are designed to function anonymously, are not so easily regulated and monitored. For now, Qatar will see exactly what it takes to police the digital realm as they start the enforcement of their new crypto legislation.
Ripple XRP Under Increased Scrutiny as a Security
Troubles for the Popular cryptocurrency XRP and its foundation Ripple continue to mount up. Recently, new evidence emerged which could place the group under increased scrutiny. A document, now making it’s away around the internet appears to show that Ripple, the company behind XRP, used the token to increase its wealth. Now, regulators want to take another look at the XRP project to determine if it is in fact, a security.
On Aug. 5, 2019, a group of investors filed a complaint against Ripple with the SEC. The report claims to provide concise evidence that Ripple used the XRP token to garnish huge profits. The report claims that the company currently is engaged in selling these tokens in excess of the need for profit.
Ripple XRP Securities?
If these allegations are found to be true, Ripple could see prosecution. Officials may want to prosecute under the sales of unregistered securities via the U.S. Securities and Exchange Commission’s laws. Specifically, the report claims that Ripple violated numerous securities laws in the state of California. The data put forth in the suit suggests that the company utilized the XRP brand to enrich themselves significantly.
The lawsuit points to a blurring of the lines between Ripple’s enterprise solutions and XRP. Notably, the report revealed that the firm holds the majority of the total supply of XRP. The company utilized its stake as a form of profit generation in a couple of key ways. For one, Ripple actively limited the supply of XRP to increase demand. Additionally, Ripple paid exchanges to list XRP with the intent of increasing its value
Ripple Holds the Majority of XRP
To grasp just how this strategy unfolded, you need to understand that Ripple is the largest holder of XRP. Notably, the firm will be for the foreseeable future. Consequently, just a one-cent increase in the price of XRP equals around $600 million in profit gained for the company.
Discussing these concerns, William Hinman, Director of the Division of Corporation Finance of the SEC made his case for the labeling of XRP as a security. He explained that whenever you have a third party that drives the expectation of a return, you are usually dealing with a security. These firms use the token to increase the value of the enterprise.
Hinman stated that the firm raised funds “in excess of what may be needed to establish a functional network.” For its part, Ripple stated that these funds went towards enhancing the functionality of the token’s ecosystem.
To put those gains into perspective, you don’t need to look any further than Co-founder Jed McCaleb. While McCaleb is no longer with the firm, he sells half a million XRP on a daily basis according to Bloomberg. Notably, other company officials engaged in this type of activity as well. However, in a recent interview, Ripple CEO, Brad Garlinghouse, adamantly denied that Ripple has any control over the price of XRP. He pointed to the losses incurred over 2019 as proof. Last year, Ripple slumped nearly 60 -percent from $0.51 to around $0.20.
XRP – What Tomorrow Holds
As one of the most popular platforms in the crypto space, XRP continues to see growing adoption. If the SEC were to label XRP a security it could have serious ramifications for those involved in the project. For now, investors continue to wait and see how the SEC’s strategy plays out.
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