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…
