In the 1920s, a new form of investment fraud roared into the
markets with the advent of the Ponzi scheme. Last week, the
Securities and Exchange Commission (SEC) filed a complaint
captioned SEC v. Okhotnikov et al. in the U.S. District
Court for the Northern District of Illinois, alleging that 11
crypto founders and promoters are using the same illegal
money-making tactics employed by Charles Ponzi a century
ago.1 The SEC alleges that the defendants employed a
“textbook pyramid and Ponzi scheme,” fraudulently raising
more than $300 million from millions of retail investors worldwide,
in connection with the crypto platform Forsage. This action
continues the wave of aggressive SEC enforcement in the crypto
space.
Key Takeaways
- The Forsage Complaint makes clear that the SEC continues to
conclude that “smart contracts” that operate on
blockchain applications and allow for transactions of digital
assets are securities, under the Supreme Court’s Howey
test.2 This is consistent with the SEC’s previous
“smart contracts” enforcement.3 - The SEC continues to pursue aggressively what it deems to be
fraudulent crypto schemes, even where key defendants are foreign
nationals and the agency will no doubt face challenges in
collecting civil penalties or other monetary relief. In the Forsage
Complaint, for example, four of the 11 defendants are Russian
nationals and are believed to reside in Russia, Georgia, and
Indonesia. The SEC’s July 2022 complaint…
