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SEC Charges Opporty for 2018 ICO

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SEC Charges Opporty for 2018 ICO

This week, the Securities and Exchange Commission (SEC) continued its ICO crackdown. This time, the firm levied charges against project Opporty Founder and Brooklyn-resident Sergii Grybniak. The firm alleges that Grybniak broke the law when his firm raised approximately $600,000 during its 2018 ICO.

News of the charges first broke via Jan. 21 press release. In the release, the SEC reveals the charges laid against Grybniak in detail. Importantly, the primary charge is participating in the unregistered sale of securities. Additionally, the SEC claims that Grybniak made false statements in order to encourage more investor participation.

These statements include a myriad of exaggerated and completely fake claims. In one instance, Opporty claimed that its 2018 ICO was “100% SEC-compliant.” Unfortunately, this claim proved to be the tip of the iceberg. Apparently, Opporty also claimed to have thousands of “verified providers” who were ready to work with the platform.

Opporty via Homepage

Opporty via Homepage

This claim became so overblown that in one piece of marketing material, Opporty suggested it had a business database that included around 17 million participants. In actuality, the firm had no partnerships. Unfortunately, these claims served one main purpose, to push more investment capital into the ICO.

Major Software Firm

As if the shower of lies put forth weren’t enough, Opporty also made some very specific partnership claims that proved to be bunk as well. According to the SEC, the firm lied about a partnership with a major software company. This lie was to help ease investor doubt about the ability of developers to deliver on their hefty platform promises.

SEC Steps In – Opporty

It doesn’t take much research to see why Opporty ended up in the SEC’s crosshairs. Now, the SEC seeks injunctions against all future digital offerings by the company. On top of the cease-and-desist, regulators require Opporty to return all the funds the company raised during its 2018 ICO. Also, the firm is to face a variety of civil penalties for its actions.

Opporty

Opporty executives sold the concept to investors as a blockchain-based ecosystem for small businesses. The platform was to provide these small-to-medium sized companies with access to advanced blockchain systems. For example, businesses could list their services and lock in their clients via smart contracts.

United States Investors

Aside from the obvious scamming that took place, Opporty made another key error in its strategy. You see, unlike many similar ICOs, the offering did not explicitly exclude U.S. investors from participating. The 2018 ICO included investments from around 200 US citizens. In this way, the firm invited the SEC to monitor its actions throughout its entire crowdfunding campaign.

An Oppurty Lost

Given the long list of violations this firm now faces, it’s easy to imagine a scenario in which Opporty decides to close its doors. Already, numerous SEC-charged firms have taken similar measures prior to refunding clients’ funds. For now, Opporty has a long legal battle and hefty fines to deal with. You can expect to hear more from this case as the SEC pursues its charges against Grybniak.

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David Hamilton is a full-time journalist and a long-time bitcoinist. He specializes in writing articles on the blockchain. His articles have been published in multiple bitcoin publications including Bitcoinlightning.com

Regulation

Supreme Court Reins in SEC on Disgorgement

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Supreme Court Reins in SEC on Disgorgement

While the SEC holds a huge amount of influence and power, they do not operate without oversight, themselves.  This was on full display on Monday, as the U.S. Supreme Court issued a new ruling on SEC authority surrounding disgorgement.

Essentially, it was ruled that, while the SEC will retain the ability to seek disgorgement from offending parties, it will be limited to their profits.  This means that if a company raises $50M through illegal means, the SEC can only seek to retrieve funds up to the $50M minus any genuine operating costs.

The purpose for this limit is a simple one – disgorgement is permitted as a remedial, rather than punitive, action.  If the SEC were to seek funds exceeding what was raised, it would no longer represent a retrieval of funds, but a punishment for their actions.

Furthermore, the ruling indicates that funds, retrieved through these means, are to be used as compensation for victims that have lost money.

Disgorgement

For those unfamiliar with disgorgement, it refers to the repayment of funds received/generated by parties which violated existing laws.

In recent years, disgorgement has been a commonly used method of the SEC, as made evident in various cases stemming from the 2017 ICO boom.

Commentary

For those interested, the entirety of the U.S. Supreme Court’s ruling can be found HERE.  While there are various intricacies involved, the court’s decision can be broadly summarized by their statement, as follows.

“The Court holds today that a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under §78u(d)(5).”

Recent Examples

As aforementioned, the SEC has turned to disgorgement on various occasions, as of late.  The following articles are a few examples of it being used in crypto based cases.

After Months of Silence by ICOBox, the SEC Seeks ‘Default Judgement’ and ‘Permanent Enjoinment’

SEC Levies Various Charges against ‘Teshuater’

Veritaseum Hit with $8 Million in SEC Fines

SEC

Based in the United States, the SEC is a government run regulatory body.  This outfit is tasked with fostering safe, and transparent, markets surrounding securities.  This entails both the creation, and enforcement, of laws surrounding the sector.

SEC Chairman, Jay Clayton, currently oversees operations.

In Other News

While Jay Clayton may still be in charge at the SEC, his time at the helm may soon be coming to a close.  We recently touched on a tricky situation, currently evolving, which would see Clayton depart the SEC for a position as an Attorney General in Southern New York.

SEC Chairman Jay Clayton Moving On?

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Regulation

SEC Chairman Jay Clayton Moving On?

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SEC Chairman Jay Clayton Moving On?

Caught in the Middle

Jay Clayton, Chairman of the SEC, has found himself caught in the middle of a tricky situation.  The story goes like this:

On June 19th, U.S. Attorney General, William Barr, announced the Trump administration’s intent to name Jay Clayton the new U.S. Attorney for Southern New York.

This announcement soon became a major point of contention, as Geoffrey Berman (the current U.S. Attorney for Southern New York) had refused to abandon his post.  This stance was changed, however, when assured that his departure would not derail current investigations.

Replacing Geoffrey Berman for the interim is Deputy U.S. Attorney, Audrey Strauss.

Burnt Bridges?

While pure speculation at this point, many believe that these actions were taken due to ‘burnt bridges’ between Berman and the Trump Administration.  More specifically, Berman was/is at the helm of various corruption inquiries into associates of the POTUS.

The situation has seen various senators weigh-in on the situation.  Notably, Senator Chuck Schumer believes an immediate investigation should be launched into the situation.  Furthermore, he had strong words for Clayton, himself, stating,

“Jay Clayton can allow himself to be used in the brazen Trump-Barr scheme to interfere in investigations by the U.S. Attorney for SDNY, or he can stand up to this corruption, withdraw his name from consideration, and save his own reputation from overnight ruin.”

Back to Roots

If this move were to happen, it would not necessarily mark a return to his roots.  Prior to his tenure at the SEC, Jay Clayton was a seasoned corporate lawyer, with decades of experience.  What he lacks, however, is experience as a prosecutor – typically a prerequisite for Attorneys Generals.

It’s Complex

While his duties stretched far beyond regulating the burgeoning blockchain sector, Clayton developed a complex relationship with the community through his time at the SEC, thus far.

Clayton has many detractors from the crypto community, as he has had a hand in the denial of many Bitcoin ETF applications.

At the end of the day, however, the world of crypto remains rife with scams,y.  Despite having massive potential, Clayton has, for the most part, made sound decisions in regulating the growth of crypto base endeavours.

Be Careful what you Wish For

While Clayton may not be pro-crypto, there are many examples throughout his tenure of openness towards these young markets.

Those excited to see his potential exit should be wary, as his successor may very well adopt a strong anti-crypto sentiment – something which could prove to be very harmful for a sector still in its infancy.

A Short Run

If opting to leave his post at the SEC, Clayton will have completed a roughly 3 year stint at its head.  So far, no word has been given on a possible successor as the Chairman of SEC.

For decades, the position of Chairman at the SEC has been a revolving door.  The last individual to serve longer than 4 years was Arthur Levitt, during the Clinton Administration.

CFTC

Word of Clayton’s potential replacement comes 1 year after the CFTC saw their very own chairman, J. Christopher Giancarlo, step down.  During their time spent at the helm of their respective organizations, both, Clayton and Giancarlo, were vocal on their approach towards blockchain.  While Clayton has remained more conservative, to this date, Giancarlo was viewed as more progressive and welcoming to change.

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Exchanges

OSC Finds Extensive Evidence of Fraud/Theft by Gerald Cotten and QuadrigaCX

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OSC Finds Extensive Evidence of Fraud/Theft by Gerald Cotten and QuadrigaCX

Over a year has passed since the demise of popular Canadian exchange, QuadrigaCX.  Despite this length of time, new findings are still being released surrounding the peculiar chain of events that saw $215 million go missing – a total representing the holdings of over 75,000 clients.

The Good

While the actions of Gerald Cotten and QuadrigaCX are, without doubt, a blight on the cryptocurrency industry, it is important to remember the old adage ‘do not paint with a broad brush’.

The OSC has, thankfully, recognized this, and taken the time to ensure readers that they are not condemning the sector as a whole, in their report.

“The misconduct we uncovered in relation to Quadriga is limited to Quadriga and should not be understood as applying to the crypto asset platform industry as a whole. Properly conducted, crypto asset trading is a legitimate and important component of our capital markets. We remain committed to working with this industry to foster innovation. Financial innovation has always been critical to the health of our economy and the competitiveness of our capital markets.”

The Bad

Now we move on to the bad.  After a thorough investigation, the OSC has determined that QuadrigaCX operated, essentially, as a Ponzi scheme underneath a ‘layer of modern tech’.  This Ponzi scheme is believed to be orchestrated by the late founder of QuadrigaCX, Gerald Cotten.

Furthermore, due to the custody model utilized by the exchange, the OSC believes QuadrigaCX to have been in consistent violation of securities laws.

“…whereby Quadriga retained custody, control and possession of its clients’ crypto assets and only delivered assets to clients following a withdrawal request—meant that clients’ entitlements to the crypto assets held by Quadriga constituted securities or derivatives.”

To this day, many of those affected by the debacle caused by Cotten have remained hopeful that the lost keys to his crypto wallets would be found.  This was due to a belief that these wallets contained much of the missing funds.  Unfortunately, the OSC has indicated that this is a fallacy.  Rather, the vast majority of missing funds were due to Cotten’s illegal trading activity.

 “It has been widely speculated that the bulk of investor losses resulted from crypto assets becoming lost or inaccessible as a result of Cotten’s death. In our assessment, this was not the case. The evidence demonstrates that most of the $169 million asset shortfall resulted from Cotten’s fraudulent conduct, which took several forms.”

If that wasn’t bad enough, the OSC concedes that, due to the circumstances (QuadrigaCX bankruptcy, and Cotten’s death), there exists very little room for recourse.

Financial Breakdown

In their report, the OSC notes that roughly $215 million is owed to QuadrigaCX customers.  They provide the following breakdown, shedding light on where the money has gone.

  • $115 million
    • Lost by Gerald Cotten through illegal trades on QuadrigaCX
  • $46 million
    • Recovered funds, now in the possession of a trustee
  • $28 million
    • Lost by Gerald Cotten through illegal trades on external exchanges
  • $23 million
    • Miscellaneous losses yet to be accounted for
  • $2 million
    • Funds stolen by Gerald Cotten to fund his lifestyle
  • $1 million
    • Operational losses

Whether through misappropriation, or illegal trades, the late Gerald Cotten is believed to be directly responsible for roughly $145 million lost in client funds.

Words of Warning

Throughout their report, the OSC doesn’t mince words when addressing companies still operating in the blockchain industry – Contact the OSC to see if registration is required under current laws.

They explicitly note, on multiple occasions, that securities laws apply in many instances, even when the traded assets are not securities.  The deciding factor comes down to how these assets are handled by exchanges.

“A platform would generally not be subject to securities legislation if the underlying crypto asset being traded is not a security or derivative, and there is immediate delivery of a crypto asset to the client after a transaction…In contrast, if a platform retains possession and control of the crypto assets being traded on the platform, securities law may apply.”

While this distinction may be small, it is an important one.  The OSC is imploring Canadian exchanges to reach out and determine where they fall within regulatory guidelines.

 “Platform operators should be aware that, depending on their business model, they may have to register with the OSC and they should take appropriate steps to comply with Ontario securities laws…Platforms should review their operations to ensure that they have procedures in place to manage risks to clients and that they are accurately disclosing key information about their operations to clients.”

OSC

The Ontario Securities Commission (OSC), is a regulatory body, tasked with ensuring fair and transparent markets.  This is done through the creation, and enforcement, of laws surrounding securities in the province of Ontario.

CEO, Grant Vingoe, currently oversees company operations.

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