Securities and Exchange Commission v. Reginald Middleton et al., “Final Judgment” (S.D.N.Y, 19 Civ. 4625, 11/1/19) [SDP]
Less than three months after getting sued by the Securities and Exchange Commission, erstwhile self-described quadrillion dollar crypto ICO issuer Veritaseum a/k/a “the market of all the money” has entered into a consent judgment that shuts it down and transfers assets to the SEC for distribution to a receiver. With sincere apologies to T.S. Eliot fans everywhere, this is the way the quadrillion dollar market of all the money apparently ends, not with a bang but a whimper.
As reported on August 13, the SEC sued Veritaseum and Reggie Middleton and again on August 24 for alleged securities fraud in connection with an ICO undertaken in 2017 and 2018. What really frosted the regulators' giblets is that when SEC staff — in the middle of an open investigation — told the defendants not to spend the money they went ahead and spent $2 million anyway to buy “precious metals”. This was a really bad idea, apparently, and led to an immediate lawsuit seeking an asset freeze.
Per the original SEC lawsuit, so-called VERI tokens were plainly unregistered securities and claims about their functionality were plainly horse puckey.
A proposed final judgment, consented to by the defendants, was filed by the SEC on October 31, 2019. The judgment was signed by the Court the next day, on November 1. The judgment contains a permanent injunction against the defendants to not violate securities laws again (I mean you’re already not supposed to), a permanent bar on selling digital securities (a bit more teeth), collection of $9.4 million from the defendants, and establishment of a fund with that money “so that the victims of Defendants’ fraud may be compensated.”
The order provides that “Defendants are jointly and severally liable for disgorgement of $7,891,600, representing certain profits gained as a result of the conduct alleged in the Complaint, together with prejudgment interest thereon in the amount of$582,535, for a total of $8,474,137. Defendant Middleton is liable for a civil penalty in the amount of $1,000,000, assessed pursuant to Section 20( d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 2l(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)].”
While this sounds like a really onerous payment obligation, the defendants don’t actually have to pay this if they transfer certain assets, by the terms of the Order. Specifically, both the disgorgement and the civil penalty are satisfied if certain assets (including a bunch of precious metals) are transferred to an intermediary chosen by the SEC. As the Order puts it:
“Defendants’ obligation to pay disgorgement and prejudgment interest of$8,474,137, and Defendant Middleton’s obligation to pay a civil penalty of $1,000,000,shall be deemed fully satisfied by the transmission of the ‘Frozen Metals’ to the Independent Intermediary in the manner set forth in paragraph VIII herein, by the transmission of the “Frozen Bank Assets” to the Commission in the manner set forth in paragraph XVI herein, and by the turnover of the ‘Frozen Digital Assets’ in the manner set forth in” the Order.”
On the one hand, Veritaseum and Reggie Middleton are very (sorry) much out of the digital asset business and have to give up all of the remaining money they apparently raised and assets bought with it. On the other hand, Mr. Middleton doesn’t have to write a personal check to the SEC if the referenced assets are transferred. All things considered, this actually doesn’t seem like such a bad deal. Also, while the entire ICO may have been overheated rhetorically and not such a genius idea securities law-wise (I mean, hence the consent order and judgment) it does actually appear that the money was being used to buy a bunch of precious metals and (as far as we can tell from the Order) not a bunch of Lambos. This may be why the whole thing did end as badly as it could have.
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