Friends making bad choices: The SEC, the Meta 1 ICO and civil contempt

There's an ongoing argument among crypto thought leaders (OK, among people who spend too much engagement on Crypto-Twitter) about whether or not bitcoin (or cryptocurrency in general) is censorship-resistant or immune from the grubby hands of jackbooted statist thugs. 

Both sides have something to say. But the extremes are ridiculous and occasionally lead to what they call "friends making bad choices" in kindergarten.

This brings me to a hilarious, predictable and "what on earth were you thinking?" opinion handed down about a week ago by a federal judge in Austin, Texas, via a lawsuit by the SEC involving something called the Meta 1 Coin and a related ICO. 

No, COVID-19 hasn't dampened the SEC’s ire or persistence. The court summarizes the original SEC lawsuit as follows:

"This case involves the Meta 1 Defendants' digital currency, the "Meta 1 Coin."  They solicited investors in an initial coin offering, claiming that the currency is backed by billions of dollars in fine art and/or gold and guaranteeing massive increases in value. The SEC alleges that the enterprise "is nothing but a vehicle to steal investors' money."  The SEC argues that the Meta 1 Defendants worked with Defendants Pramana Capital, Inc. and Peter K. Shamoun a/k/a Peter K. Shamoon to funnel money into various accounts."

The Meta Coin website apparently says, among other things, that it "owns $1 billion of art, gold mines or gold bars, or other assets in amounts sufficient to repay the Meta 1 investor.”  The SEC says this is total horse puckey and, as you will see below, the court agreed. 

(Also, as a threshold question, I guess: if you had a billion dollars in art, gold mines or gold bars, why would you go to the trouble of selling crypto tokens?)

The SEC requested and the court granted a temporary restraining order on March 16, 2020, and then held a preliminary injunction hearing on April 13, 2020 by telephone. The fact that people were not able to attend in person because of the pandemic did not stop the proceedings from going forward on that date.  In the TRO order, "the Meta 1 Defendants were also instructed file a sworn accounting of investor funds with the Court on or before March 26, 2020. (Id. at 14). And the Court ordered the Meta 1 Defendants' assets frozen."

In spite of the order, the defendants continued to sell the token (which the court had ordered them not to do) and didn't file a sworn accounting of funds. 

In addition: “[i]n the Meta 1 Defendants' communications with investors, they explicitly, repeatedly, and disparagingly refer to this case and the SEC's attorneys, even accusing them of perjury.” And then there's this: "they return documents with the word 'fraudulent' written over them, (see id.), and have filed documents with the Court rejecting its jurisdiction and claiming the SEC is illegitimate[.]"

Anyway, if you were in kindergarten, your teacher might tsk-tsk and say "friends are making bad choices." In the world of adults and foolish ICOs, you get held in contempt, which is what happened here. This is how a court can compel compliance with its orders, with the assistance of the U.S. Marshal Service.

In this case, the SEC asked the court to hold defendants in civil contempt, imposing fines, imprisonment, or both. Here, the SEC pointed out that "[s]ince the Court issued its TRO, Meta1 has posted at least 31 videos to its YouTube channel, all of which are publicly available worldwide. While the content varies, all of the videos either market the Meta 1 Coin, offer it for sale, or contain false and/or misleading statements about the nature of the investment." The most recent video was posted on April 20, 2020,” the very day that the Contempt hearing was held. And one of the defendants tried to speak to the court directly, without the SEC, which is what we call in the trade ex parte communication. This is, as a general rule, not allowed.

As you probably expected, the court was not amused by the defendants' antics and granted the SEC's motion. The court's orders were in effect and the proscribed conduct and compliance was not adhered to by the defendants.  When a federal court tells you "do X" and you don’t do it … that's an excellent way to get smacked by the court.  

And personal appeals apparently don't work so well, either.

Here, the court ordered two of the defendants to be put in jail until they comply with the court’s orders – take down the website, provide an asset inventory and stop selling the darn tokens. Because civil contempt is supposed to coerce compliance and not serve as punishment, the court said that they would be released once they provided proof of compliance with the court’s orders. 

And so, the U.S. Marshall service was ordered to arrest them.

Anyway, I have to say that I find it generally perplexing that anyone thinks that calling the SEC lying perjurors and refusing to comply with a federal court injunction is going to get them very far. But that’s the hill that these folks apparently intend to be incarcerated on – the hill of friends making bad choices.