The SEC recently charged two Florida men and their Cayman Islands company, Blockchain Credit Partners, for unregistered sales of over $30 million of securities using so-called “decentralized finance” (DeFi) technology. The SEC also charged them with making misrepresentations about their business, DeFi Money Market, to investors.
The SEC found in its Order that Gregory Keough, Derek Acree, and their company, Blockchain Credit Partners (BCP), made unregistered offerings and sales of securities through DeFi Money Market from February 2020 to February 2021. The SEC found that they sold two different types of tokens: mTokens that purportedly paid 6.25 percent interest, and DMG “governance tokens” that supposedly gave investors certain voting rights, excess profits rights, and the opportunity to profit from DMG governance token resales in the secondary market.
As the SEC found, the respondents solicited investors by stating that DeFi Money Market (DMM) could pay the interest and profits because it would buy “real world” assets that generated income, like car loans, with investor moneys. But the SEC found that the respondents quickly realized that DMM could not operate as promised because the price volatility of the digital assets created risk that the income generated would not be enough. But instead of informing investors, the SEC found that the respondents falsely told investors that DMM had bought car loans, purportedly even displaying them on DMM’s website. While the respondents operated a separate company that owned car loans, DMM never owned any of the loans. Instead, the SEC found that the respondents used their own moneys and moneys from the other company they controlled to meet mToken redemptions.
“Full and honest disclosure remains the cornerstone of our securities laws – no matter what technologies are used to offer and sell those securities,” said Gurbir S. Grewal, Director of the SEC Enforcement Division. “This allows investors to make informed decisions and prevents issuers from misleading the public about business operations.”
Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, stated: “The federal securities laws apply with equal force to age-old frauds wrapped in today’s latest technology. Here, the labeling of the offering as decentralized and the securities as governance tokens did not hinder us from ensuring that DeFi Money Market was immediately shut down and that investors were paid back.”
The SEC found that respondents violated Sections 5(a) and 5(c) of the Securities Act of 1933 by making unregistered offers and sales. The SEC further found that the respondents violated the antifraud provisions of federal securities laws.
Without admitting or denying these findings, the respondents consented to a cease-and-desist order that includes disgorgement of over $12.8 million, and penalties of $125,000 each for Keough and Acree. In addition, the respondents have funded the smart contracts so that mToken holders can redeem their mTokens.
If you have suffered investment losses in this alleged scheme, you may have a legal claim. The securities attorneys at Morgan & Morgan’s Business Trial Group are here to help. Please contact us at 888.744.0142 or visit us online for a free consultation.
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