The U.S. District Court for the Eastern District of New York froze the assets of a "self-described financial guru" charged with defrauding investors out of millions of dollars through the unregistered offering of digital asset securities.
In its complaint, the SEC charged Reginald Middleton and his company Veritaseum with violating the registration, antifraud and manipulative trading provisions of the U.S. federal securities laws. The SEC also requested permanent injunctions, disgorgement plus interest and penalties, and a bar from offering digital securities.
The SEC claimed that Mr. Middleton knowingly (i) created a false investor demand for "VERI" tokens, (ii) engaged in manipulative trading, and (iii) made falsified statements of having the product ready to generate revenue even when there was no such product. Further, the SEC alleged that Mr. Middleton transferred a "significant" amount of dissipated assets from investors into his personal account.
Pursuant to the emergency action, the SEC froze approximately $8 million of approximately $14.8 million raised in the digital securities offering.
Commentary
The temporary restraining order in this matter answers the practical question, "how can digital assets on a blockchain be frozen?" The answer requires cooperation from the party that controls the blockchain assets, but is otherwise straightforward. First, the parties select a qualified, third-party intermediary that controls an address on the blockchain. Second, the person in control of the assets to be frozen must give up that control by transferring the digital assets to the intermediary's blockchain address. Third, the intermediary holds the digital assets "in escrow" pending further direction from the court.
Commentary
Fraudsters who use "ICOs" as a device to get around the application of the securities laws make life more difficult for legitimate start-ups who are using blockchain technology to create assets that really are not "securities."
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