Lies, damn lies, and the Blockvest ICO litigation

Quick Take

The SEC v. Blockvest is a lawsuit filed in 2018 seeking to enjoin the Blockvest ICO and return money to investors.
In a much heralded early opinion, the Court initially refused to grant the SEC injunctive relief, which was taken as a victory of sorts by the crypto community at large.
It turns out that the Defendants had submitted false and perjured evidence
The Court has now issued a recommendation that the case terminate and judgement be entered in favor of the SEC and against the Defendants.

Many ICOs began with a bang and ended with a whimper (see, generally CoinMarketCap dot com for a selection). Some ended with a subpoena an investigation and a settlement with the SEC.

And then are the ones that started with a bang and ended with a federal judges imposing case ending sanctions on the perpetrators of the alleged token-y dipshittery.

Thus is the case with the Blockvest ICO, which caught the attention of the SEC in 2018 and led to a lawsuit seeking injunctive relief, including an asset freeze, disgorgement of funds and a civil money penalty. You may recall that this ICO claimed to have been "registered and approved" by and with the SEC and (just for shirts and giggles, apparently) an entirely fictitious agency called the Blockchain Exchange Commission, which didn't exist and used the SEC's seal.

Per the Court's Order issued in late April of this year:

"The Complaint further alleges that Blockvest claims to be the "first [U.S.] licensed and regulated tokenized crypto currency exchange and index fund," that it has already raised more than $2.5 million in pre-ICO sales of its BLVs, and it will raise $100 million during its ICO to fund Blockvest's digital asset-related financial products and services. Plaintiff contends that Defendants falsely claim that their ICO has been "registered" and "approved" by the SEC and other regulators, and that Defendants have partnered with and are audited by Deloitte Touche Tohmatsu Limited. Plaintiff further alleges that Defendants created a fictitious regulatory agency, the Blockchain Exchange Commission ("BEC"), in order to create legitimacy and an impression that their investment is safe."

If you follow these things closely, you might recall that the case got some attention on social media because Blockvest was initially able to get the Court to hold off on determining that Blockvest's BLV token was, in fact, a security. The Court held – based in part on Declarations (sworn statements under oath) submitted by the Defendant – that it could not determine "whether the BLV token offered to the 32 test investors was a 'security' [or] 'whether the 17 individuals who invested in Rosegold purchased 'securities' as defined under the federal securities law.' The District Judge also found that Plaintiff failed to show a reasonable likelihood that Defendants would repeat their violations because 'it is disputed whether there have been past violations.'"

There was much ado about this because some claimed that it showed that if you fought the SEC on token-y issues you might win, and that not every ICO token was a security. What they failed to take into account was that someone who commits securities fraud might also submit false and altered declarations to a federal judge.

Yes, that's right – the same genius behind the Blockchain Exchange Commission also hanky-pankyed some sworn statements. This was a bad a choice, they got caught, and this opinion ensued.

What happens when you submit false evidence to a federal judge? In some cases, the Court can enter case terminating sanctions – including entering a judgment against a defendant without trial or any other evidentiary submission. That is what the federal magistrate judge who wrote this opinion recommended to the district court.

So after that initial victory, it seems that things went downhill for Blockvest and its principal Reginald Buddy Ringgold, III a/k/a Rasool Abdul Rahim El. The district court judge reconsidered its initial order and held that there was a factual dispute about whether certain individuals had actually purchased securities. The defendant's lawyers also quit in December 2018 (with court approval) and they have not been able to find anyone else to represent them.

Following discovery, including depositions, the SEC filed a motion for "terminating sanctions," asking the Court to enter judgment against the Defendants for forged and false declarations in support of their opposition to the SEC's preliminary injunction motion.

Here's an example of some of the testimony cited by the SEC:

Q: So someone under your name adds this paragraph that you had never reviewed the Blockvest website or white paper or anything else on the Internet about Blockvest, right?

A: Correct.

Q: That's false, right?

A: Yes.

Q: Because you did, in fact, review the Blockvest website before you decided to purchase, right?

A: Yes.

Q: And you did review other materials about Blockvest before you decided to purchase, right?

A: Yes.

Q: So someone added a completely fabricated statement under your name to the Court; is that right?

A: Yes.

Q: And, in fact, what you testified to earlier is that there was information about Mr. Ringgold in some of the materials you reviewed about Blockvest, right?

A: Yes.

Q: And you reviewed those in connection with—prior to your purchase of Blockvest tokens, correct?

A: Yes.

Q: So this paragraph's false also, right?

A: Yes.

Q: And, again, somebody added a false paragraph under your name to the Court?

A: Yes.

Q: And it wasn't you, right?

A: Yes.

Q: And you didn’t authorize them to do that, right?

A: Correct.

This sort of behavior, per the Court, was repeated for at least 4 of the Declarations that the Defendants submitted.

It is a very, very bad idea to lie to a federal judge, and to alter sword statements. As the Court explains:

"The declarations at issue that Defendants filed with the Court contained numerous false statements, and one declaration was forged. The declarations were filed in support of Defendants' opposition to Plaintiff's motion for a preliminary injunction and concerned key issues in this case. When a party falsifies evidence of central importance to a case, this shows bad faith, willfulness, or fault[.]"

Given the gravity of this misconduct, the Court found that it would be fair and appropriate to enter a judgment against the Defendants and recommended this to the District Court. While the District Court is not required to accept the magistrate's recommendation, it's very difficult to imagine this happening. Ringgold did object to the magistrate's recommendation, as is his right, and if you will read the following excerpt you will see why I don't give it much of a shot:

It's clear that this is being prepared without the benefit of a lawyer and, well, it's about what you'd expect from the creator of the Blockchain Exchange Commission.

While this case clearly involves bad actors and bad conduct, it's also a dark mirror of the fabulism behind most ICOs, the much-touted disruptive-ness and new era of the SAFT. It shows how it all crumbled to dust, washed away like tears in the rain or a sand castle brushed hard at high-tide when questions were asked and a federal judge took a gander.

All it took was several years of litigation and millions of dollars lost – but all of these fantasies have died.